I recently received an email from my company’s 401k plan manager asking me the question: “have you got enough cushion?” In other words, they were asking, based on the amount of money I’m contributing to retirement today, if it will be enough? Further into the note, their suggestion was to save as much as I can now in order to have padding to pursue my future goals.
So, what is the best way to determine how much you’re going to need to save for retirement? Let me start by saying I’m not a financial professional, or a retirement planner. I don’t claim to know all the aspects of retirement planning, but I think this post will give you some important points to consider for your situation.
With retirement savings not being my primary goal right now, I did a little bit of research to find out what types of resources are available to tell me how much I need to save when the time is right. Almost instantly, I found an interesting post from J.D. Roth at Get Rich Slowly exploring this topic further. J.D. identifies a common dilemma in retirement planning.
The problem is that nobody seems to agree on what assumptions to make when planning for retirement. How much should you assume for inflation? For investment returns? For rising health-care costs? How long should you expect to live?
Is there really not a good way to determine how much you need to save for retirement and are we better off just maxing out savings as much as we can today? Perhaps focusing on the amount to contribute is the wrong approach.
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Focus On How Much You're Going To Spend
Rather than focus on how much to save, J.D. leans towards finding out how much you’re going to spend and says:
If you can live a lifestyle that is comfortable but not extravagant, you will effectively decrease the amount you need to save for retirement.
This approach makes a lot of sense to me. It seems a logical approach to planning for the retirement years is to do the following:
- Consider what you’ll be doing and the associated lifestyle.
- Adjust your lifestyle as much as possible today to align or to eventually transition into your lifestyle at retirement
- Build your savings goals, investment strategy based on that chosen lifestyle.
Of course, there is still the dilemma of estimating all of those other items such as inflation, returns, etc., but I suppose that’s probably best to leave that up to investment calculators and financial advisors of your choice.
So, if my focus is on what I’ll be doing and how I’ll be spending (and not blindly saving hoping for the best lifestyle possible), I think I can make some fairly accurate assumptions.
Retirement – A New Idea?
According to an MSN article retirement is a fairly new idea:
The whole concept of retirement is fairly recent, an experiment that began with the creation of Social Security in 1935, observes Ken Dychtwald, a gerontologist and authority on aging in the U.S.
Scripture doesn’t mention such a thing either. Larry Burkett references Numbers 8:24-26. He tells us the following:
As long as one is physically and mentally capable there is no scriptural basis for a person to retire and become unproductive.
Personally, I don’t consider my future retirement years as workless. What about you? Rather, I hope to position myself to achieve true financial freedom. To me, this means I’ll be able to give more of my time and resources to help others. And you probably would guess that’s helping people in the area of personal finance.
My friend John Gay, who is a financial planner and advisor, wrote an article at One Money Design during last year’s retirement week. His advice:
If retirement is like landing a plane, what is the best retirement plan? Don’t land the plane (just let it run out of gas).
How Much Do I Need To Save?
Considering my plane isn’t going to land (I know what I want to do in retirement) and I can probably do some estimating around this lifestyle, I can then get back to the original question of how much I need to save.
So, how should you go about answering that question and identifying the savings amount?
1. Regardless of where you are with emergency savings and debt reduction you should save up to the minimum amount required to receive a company match on 401k contributions.
2. Next, there are a number of retirement calculators on the internet provided by trusted websites. I think this is a good place to start. I think this one from MSN Money is a pretty good retirement calculator.
2a. Visit with a financial advisor to discuss your lifestyle at retirement and seek some planning advice.
3. And finally, when it’s the right point on my financial journey (debt paid off and emergency savings funded); I’ll increase my contributions as much as possible to provide for my future lifestyle.
In closing, I’ve decided not to join the panic about retirement savings. While I think everyone should save and invest for the future, I don’t think it should replace important goals such as getting out of debt and building emergency savings. The only time there is an exception to this rule is when a company provides a match to your contributions. Invest to get the match if you can still make forward progress on debt or emergency savings goals.
When I reach the point of extending my contributions, I’ll consider my lifestyle and save accordingly. But beyond all of the calculating and planning, I’ll trust God to provide for my needs and put me where he wants to me to serve Him.
What’s your take? How do you plan to make sure you’re saving enough for retirement?