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make early, regular contributions to your employer’s deferred compensation plan, and establish a savings pattern and lifestyle that never take into account that portion of your income. As an older investor, you have to consider retirement savings a necessary expenditure, not a discretionary one. You will also have the challenge of applying more strategies to meet your goal.
The Young Investor
When starting a new job with an employer who offers a salary deferral or defined contribution plan, how much should you defer? Based on the Social Security tax of 12.4 percent of wages and the fact that Social Security retirement benefits pay out about 40 percent of earnings at age 67, your strategy should ultimately be to save 15 to 20 percent of gross income—more if you plan to retire early. You don’t have to start at that level if part of your strategy is to dedicate some or all of your future salary increases to savings until you reach that level. If you are barely making enough to get by, set up a budget and track your spending habits over a few months. Distinguish between wants and needs.
Controlling out-of-pocket expenses can help fund a retirement plan. A partial list of expense items to consider includes credit card debt, clothing purchases, personal care expenses (cosmetics, haircuts, hair dying, manicures, pedicures, spa treatments, etc.), cell phone plans, eating out (both lunch and dinner), expensive entertainment, daily lattes and happy hours, lottery tickets, grocery bills (prepared foods and deli items are expensive; many store brands are indistinguishable from national brands), DVDs, iPods, and music downloads.
Also consider some less frequent expenses, such as insurance deductibles and the big hitters—transportation and housing costs. No one expects you to be a hermit, but there are many small purchases made each week that do not significantly impact happiness, social interactivity, or well-being. Jean Chatzky characterizes some of this spending as “unconscious consumption”; if unchecked, such spending undermines your savings goals.
The Older Investor
At this point in your life, your well-established spending habits have provided you with a good idea of how much annual income you will need in retirement. The Social Security and pension income numbers you provided when calculating the savings needed to support your future lifestyle are fairly solid. The gap remaining will need to be filled by future savings and the income from your investments. Returning to the example of a $1 million goal with $600,000 saved, if you are 5 years (60 months) from retirement and you expect your investments to return a conservative 5 percent, the calculation is as follows: the $600,000 current savings earn 5 percent per year over 5 years to grow to about $765,000, leaving a gap of $235,000 for which you have to budget. Using a compound interest calculator with length of savings equal to months to retirement, you would have an approximate savings goal of about $3,500 per month. (This assumes that half of the savings go into tax-deferred accounts.)
If you know how much you can afford to save and how much you need to save, you can also use the same formula to solve for the number of months you must continue to work until you can afford to retire. Choose from a number of online interest calculators at www.analyzenow.com , www.choosetosave.org , www.AARP.org , or www.MSNMoney.com .
If you are approaching retirement, you may need a strategy of savings and cost reductions that go beyond the daily expense controls employed by the younger investor. Think of the process as a lifetime spending plan where you can adjust either your lifestyle today or your time line for tomorrow to achieve your goal. In the example, the $3,500 per month needed for five years is reduced by $1,000 per month if you delay retirement by two years.
If you have a hard retirement date, here are some expense reduction and savings strategies: If you have credit
The Young Investor
When starting a new job with an employer who offers a salary deferral or defined contribution plan, how much should you defer? Based on the Social Security tax of 12.4 percent of wages and the fact that Social Security retirement benefits pay out about 40 percent of earnings at age 67, your strategy should ultimately be to save 15 to 20 percent of gross income—more if you plan to retire early. You don’t have to start at that level if part of your strategy is to dedicate some or all of your future salary increases to savings until you reach that level. If you are barely making enough to get by, set up a budget and track your spending habits over a few months. Distinguish between wants and needs.
Controlling out-of-pocket expenses can help fund a retirement plan. A partial list of expense items to consider includes credit card debt, clothing purchases, personal care expenses (cosmetics, haircuts, hair dying, manicures, pedicures, spa treatments, etc.), cell phone plans, eating out (both lunch and dinner), expensive entertainment, daily lattes and happy hours, lottery tickets, grocery bills (prepared foods and deli items are expensive; many store brands are indistinguishable from national brands), DVDs, iPods, and music downloads.
Also consider some less frequent expenses, such as insurance deductibles and the big hitters—transportation and housing costs. No one expects you to be a hermit, but there are many small purchases made each week that do not significantly impact happiness, social interactivity, or well-being. Jean Chatzky characterizes some of this spending as “unconscious consumption”; if unchecked, such spending undermines your savings goals.
The Older Investor
At this point in your life, your well-established spending habits have provided you with a good idea of how much annual income you will need in retirement. The Social Security and pension income numbers you provided when calculating the savings needed to support your future lifestyle are fairly solid. The gap remaining will need to be filled by future savings and the income from your investments. Returning to the example of a $1 million goal with $600,000 saved, if you are 5 years (60 months) from retirement and you expect your investments to return a conservative 5 percent, the calculation is as follows: the $600,000 current savings earn 5 percent per year over 5 years to grow to about $765,000, leaving a gap of $235,000 for which you have to budget. Using a compound interest calculator with length of savings equal to months to retirement, you would have an approximate savings goal of about $3,500 per month. (This assumes that half of the savings go into tax-deferred accounts.)
If you know how much you can afford to save and how much you need to save, you can also use the same formula to solve for the number of months you must continue to work until you can afford to retire. Choose from a number of online interest calculators at www.analyzenow.com , www.choosetosave.org , www.AARP.org , or www.MSNMoney.com .
If you are approaching retirement, you may need a strategy of savings and cost reductions that go beyond the daily expense controls employed by the younger investor. Think of the process as a lifetime spending plan where you can adjust either your lifestyle today or your time line for tomorrow to achieve your goal. In the example, the $3,500 per month needed for five years is reduced by $1,000 per month if you delay retirement by two years.
If you have a hard retirement date, here are some expense reduction and savings strategies: If you have credit
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