A few weeks ago, we discussed The 4% Rule, and how you can easily estimate the total amount of investable assets you will need to have a successful retirement. Now that you have nailed down your monthly expenses and know your “number”, when would you like to retire?
Regardless of where you are in your investment and retirement savings journey, you have the ability to take control today and get on the right track.
You may have added up your monthly expenses and realized you are a long way away from reaching your retirement number.
However, with a dedicated approach to managing your personal finances, you can determine when you’d like to reach your end goal with some simple math.
Your Savings Rate Is More Important Than Your Investment Returns
This, unfortunately, is not conventional wisdom. Let me say it again, your savings rate is more important than your investment returns.
Forget chasing returns, finding the hottest stock to invest in, and timing the market - just increase your savings rate. Plain and simple.
In the chart below, I am assuming an individual with a $50,000 income and investing over a 30-year timeframe. As you can see, after the 30-year period, if you save 6% of your income and have a 1% return, you will have a larger balance than if you save 1% and have a 10% return!
Ideally, you will get the best of both worlds (saving more and higher returns), but you can see that the one aspect you can control (savings rate) is the most important of the two variables.
Starting From Zero
Now that you see how important your savings rate is, let’s see how long it will take until you can achieve your “number” so you can live by The 4% Rule.
The numbers we go over below are assuming you have zero dollars saved to date. If you already have a jumpstart on your savings, all the better. You will be able to either retire earlier than these basic calculations show, or be able to afford a reduced savings rate.
The variables to consider when making this calculation are your savings rate, investment return, inflation, and withdrawal rate. To keep things light, we will assume a 5% annual investment return after adjusting for inflation, and a 4% withdrawal rate.
Inflation is the biggest factor here in why it may take longer to reach your retirement goal than you think seems reasonable. If inflation continues to average around 3% per year, cost of living will double every 25 years.
As you can see here, just saving the bare minimum of 5-10% of your income creates a real uphill climb.
Are you 25 and want to retire by 50? Saving and investing 35% of your income will help get you there.
This shows the importance of a few things: starting to save early and minimizing expenses.
Factors To Consider
I hope these charts have given you a good picture as to what type of commitment it takes to achieve a successful retirement. It’s not easy, but it is very doable.
Besides the amount you save up on your own for retirement, you will also have Social Security to help supplement your retirement income. In today’s dollars, after a full working career, most individuals can expect Social Security income of $1,000-$2,500 per month. It is critical to know what your Social Security income is projected to be - so be sure to check here.
Do you expect to receive an inheritance? I would never recommend you rely on receiving an inheritance from your loved ones, but it will certainly ease the retirement burden if you are fortunate enough. Even if you do believe you will receive an inheritance, I suggest you plan and save as if you are not, just to be safe. If the inheritance does come through in the end, you will be that much better off or be able to focus on charitable giving.
Do you have a pension at work? Pensions are less common today, but those in government, education, and other large corporate roles still may receive some type of pension retirement benefit. This may not cover 100% of your needed retirement income, but can have a huge impact in bridging the income gap.
Where do you stand as it comes to saving for retirement? Whether you are just starting out in your career or trying to make a last minute push towards retirement, you now know what it will take going forward.
Follow the basic principles of saving for retirement and you will be on your way:
Invest the rest