Retirement Planning First Steps
Tell me if this sounds familiar. You want to learn something new so you open up Google and start searching for how to do it. You skip by all the beginner 101-type posts and go right for the expert-level information. You think to yourself, “Why waste time with the basics when I can skip ahead and see what the experts are doing?”
This is exactly what I did this summer when I wanted to learn the guitar. The first thing I did was drop a few hundred bucks on a mid-level guitar – not a starter one. I then watched hours of YouTube videos trying to figure out how to play “Ripple” by the Grateful Dead.
You can guess how this turned out. Since I didn’t learn the basics of how to play chords and strum the guitar, I got frustrated and ended up quitting within a month. I was too impatient to learn the basics, and I sit here today still not knowing how to play guitar.
Retirement Planning First Steps: A Guide
This is exactly what a lot of people do with their retirement. The need to “do something” is so overwhelming that they skip ahead to complex retirement topics without first understanding the basics. This leads to confusion and inaction.
In this post, I’m going to guide you through the essential first steps in the retirement planning process. After learning some basics, there will be a calculator that you can use to see how well you’re doing. To make this easy, I’ve also created a downloadable guide, which you can get below.
Please take time to understand the basics before you worry about Traditional IRAs, Roth IRAs, and 401(k)s. There will be a time to address these questions, but only after you understand the big picture. Don’t make the mistake that others make with retirement…or that I made trying to learn the guitar!
The Essential Question: How much will I need?
Quick question: How much should you be saving for retirement? Go ahead and Google that question. You will find hundreds of posts saying you should be saving X% of your income each year.
Popular opinion is that you should be saving 10-15% of your income each year for retirement. It makes for a nice rule of thumb but I find it way too general. What’s your age? At what age do you want to retire? How much do you have saved up already? Everyone will have different answers to these questions. One person may need to save 5% of their income while their next door neighbor might need to save 30% or more! That’s why I take these rules of thumb with a grain of salt.
Let’s take a more scientific approach to this. How much you’ll need for retirement depends on how much you expect to spend while you’re retired.
To figure out how much you might spend in retirement, it’s easiest to look at how much you spend on your lifestyle today. Ask yourself, “Do I want to live in retirement like I am living today?” If the answer is yes, then let’s start there.
Use the worksheet below to estimate your living expenses in retirement. Once you have this worksheet done, you are going to use these numbers to calculate your retirement preparedness.
Before I have you plug numbers into retirement calculators, I must make this disclaimer (for your good, and for mine!) THERE ARE NO GUARANTEES IN LIFE. Any retirement calculator you find – including the one here – is going to use an average of historical stock and bond market returns. Very few people will actually achieve exactly average market returns. Your results could be better than average, or they could be a lot worse if history doesn’t hold. Please read my disclaimer here.
Next Step: Plug Your Numbers Into the Calculator
Go to https://honeylakeadvisors.com/retirement-calculator to access our online savings calculator.
1- Enter your age and your current annual gross income (gross income is your pre-tax income) and click Let’s Get Started. You can get your annual gross income by taking the number you put in Line A of the worksheet and multiplying by 12.
2- Click “Retirement” on the next screen
3- On this screen, you’ll enter the following:
- “At what age do you want to retire?” The system defaults to Age 65, but you can change it to whatever retirement age you want.
- “What percentage of your current income do you want in retirement?” Go back to Line E of the worksheet and put that percentage in this box.
- “How much do you have saved?” Add up the values of all the retirement savings accounts you have today. 401(k)s. IRAs. Any money you’ve already saved for retirement goes in this box.
- “How much per month are you saving?” Go back to Line B of the worksheet and put that number here.
4- Click CALCULATE and see your results.
To help you understand the results, let’s use an example: a mythical Jack and Jill Smith. Here are their key stats:
- Age 40
- Make $100,000 a year
- Want to retire at age 65
- Want to live on 80% of what they currently make
- Have $125,000 already saved for retirement
- Are saving $1,000 per month for retirement.
Using these numbers, you can see how their retirement plan is looking.
The calculator will estimate three outcomes depending on different investment return assumptions: Average market returns, Below Average market returns, and Above Average market returns.
It’s easy to see how different market returns affect your retirement picture. That’s why I always caution people with these calculators. They’re good for taking your retirement “temperature” but should never be viewed as a guarantee.
The line “Likely Amount Needed” looks at your projected living expenses in retirement and the number of years you will be retired. Put another way, this is how much money you should expect to use while you’re retired.
Right below that you will see “Likey Amount Available.” This is based on how much you already have stashed away and how much you are saving each month. It also assumes the different market return scenarios.
For the Smiths, the calculator estimates they will only have 72% of their retirement needs covered if they keep doing what they’re doing today (looking at the average return scenario.) If market returns are bad, that percentage drops to 60%. But if they get lucky with good market returns, the percentage approaches 100%.
What Can You Do if You’re Behind?
If the system says you are behind on your retirement savings (i.e. less than 100%), don’t panic. You’re not alone, I promise!
The calculator will suggest some things you can do to meet your retirement goal. These things include:
- Retire later
- Save more each month
- Spend less in retirement
Let’s see what suggestions the calculator made for the Smith Family:
The calculator offers three different options for the Smiths to close the retirement gap. Please note that the Smiths would choose one of these options, not all three at the same time.
But what if saving another $702 per month is too much on the Smith’s budget? Or what if retiring at age 68 is a non-starter for Jill?
The reality is this: an advisor will recommend a combination of all three options. Save a little more each month. Retire a year or two later. Live on a little less during retirement. You’d be surprised how quickly small changes in these variables can close the retirement savings gap.
My suggestion if you are behind: Start by increasing your retirement age by one year. Hit Calculate again. Add a bit more to your monthly savings amount – say $100. Click Calculate again. Keep doing this until you get closer to 100% for the average market return scenario.
The key idea I want you to walk away with from this exercise is understanding that retirement planning involves many variables. And those variables can be “tweaked” to arrive at a retirement plan you’re happy with. Retirement planning is as much an art as it is a science.
Understand the basics, then move on to more complex questions
This exercise was simple by design but important in developing your understanding of retirement planning. As you nail down numbers for “How much will I need?” and “How much should I save?” you’ll find that the more complex retirement questions start to answer themselves.
Take the Next Step and Download Our Guide
I’m a pencil & paper kind of guy. This guide walks through everything you learned here. A worksheet is included within the guide to help you.
By downloading the guide and signing up to receive my weekly blog, you will:
- Put some real numbers around your retirement plan
- Stay on top of important financial topics
This will set you apart from your neighbors!
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