Smart Savings: Taking Savings to the Next Level
In the first installment of our Smart Savings series, we talked about the steps that a new saver -- like a recent college grad -- should take to start off on the right foot. We talked about some of the main types of savings plans and a plan of action to get started. And of course while we were primarily talking about younger savers, it's better late than never to start saving, so if you find yourself a little older and just starting to save, that first article is a great place to start.
But for the rest of the readers, it's time to move on to the next stage of life. You're at that point where you can no longer consider yourself new to the workforce and the wonderful world of “Mom and Dad” chipping in is ancient history. You may already be married and starting a family or thinking about starting one, or you may be single and perfectly happy. But one thing is for sure: it's time to tighten the screws on your savings plan.
Getting specific
One of the keys to achieving a goal is to have a specific goal in the first place. "Retiring well" might sound like a reasonable goal, but it's going to be very hard for you to figure out exactly how much you should be saving today to "retire well." That's right, it's time to sit down and determine exactly how much money you want in the bank when you retire.
It would be great if there was a pat answer that we could give to everybody when this question comes up. Unfortunately, there isn't. The amount that you'll need when you retire will depend on factors like what kind of lifestyle you'll want at retirement, what part of the country you live in, whether or not you'll work at all in retirement, and what's reasonable given your current income and resources.
And be sure to consider the effects of inflation when setting your retirement goal. If you want to live on $60,000 per year in retirement (in today's dollars), don't assume that you can set your retirement goal based on $60,000. Assuming inflation of 4% over the next 15 years, you'll need $108,000 at retirement to live the same lifestyle as that $60,000 today.
Once you've settled on an annual budget for your retirement, you can use the 4% rule to calculate the total amount you'll need in the bank on day one of retirement. The 4% rule simply means that you should plan to withdraw no more than 4% from your account in the first year of your retirement. In the case of the $108,000 above, your retirement goal would be $2.7 million.
This is all a fair amount of work and involves a bit of head scratching, but it's imperative that you take the time to set a retirement goal. In the context of what we're working on here, if you don't have a retirement goal set, you don't get to pass "Go" and “you don't collect $200”.
However, once you have your goal, the next step -- calculating your required monthly savings -- is comparatively simple. Just head over to the Smart401k retirement calculator and enter your information. [Though the default rate of return in the calculator is 10%, we recommend changing that to 8% to err on the conservative side]. Simply click "submit" when you're finished and you'll be given the annual amount you'll need to save to reach your retirement goal.
Getting budgeted
Ok, now it's time to pull out your budget... What? You don't have a budget yet? A budget is a crucial tool in managing your personal finances and we highly recommend that you sit down and determine a reasonable budget that you can stick to. A budget is a great way to make sure you have all of your expenses accounted for and reduce the chance that important things (like saving for retirement!) don't fall through the cracks.
There are plenty of different ways to create a budget, ranging from a handwritten one on loose leaf paper (not highly recommended) to a highly structured Excel spreadsheet. For those who like to keep things as simple as possible, online spending tracker Mint.com is a great choice. You can set up on Mint for free and it will track your spending and help you set realistic budget goals.
Whether you already had a budget or you just finished putting one together, you now need to check the line in your budget for retirement savings against the estimate that you just calculated on the Smart401k calculator. If the numbers are close, the same, or you are already saving more than your new estimate then that's great, you're already right on track.
If you're not saving enough, though, you have two options. The first is to reevaluate your budget to bring your annual retirement savings up to where it needs to be so that you can reach your goal. The other option is to revisit the assumptions that you made when calculating your retirement goal and consider bringing your goal -- and your ideas about retirement -- more in line with what you can realistically save for.
Staying focused
At this stage of life it's easy to overlook the importance of saving for retirement. Retirement certainly seems more real than it did when you were first out of college, but at the same time it can still seem far enough away to make it easy to put off saving for it.
Often pushing it further to the back burners are the life changes going on at this time in your life. If you already have a family, you're likely faced with new expenses that you've never had before, not to mention the urge to start saving for things like college for your kids. Even if you're not yet settled down with a family, you may be headed in that direction, or you may be looking at other big financial moves like buying your first house.
But it's important to resist the urge to let the rest of your life push saving for retirement to that perpetual tomorrow that almost guarantees that you'll be unprepared when the big day comes. This is where the budget comes in particularly handy -- if you've put together an accurate budget and have included retirement savings as a mandatory monthly expense, it's much more likely that adequate retirement dollars will be finding their way from your paycheck to your retirement account.
Taking action!
A little time and effort can go a long way towards making sure that when you're ready to retire, retirement is waiting for you with open arms and an adequate bank account. Reviewing what we've discussed above, here are the action steps you should be taking to make sure you're on track financially for retirement:
- Set a goal for how much money you'll want in the bank at retirement
- Determine the annual or monthly level of savings needed to attain that goal
- Create a budget (or modify a current budget) that accounts for the savings level above
- Stick to the budget and build your retirement nest egg!
In the end, the quality of your retirement will depend a lot on the decisions that you make now in preparing for that time of your life. If you're smart about your savings plan today, you'll likely find yourself in a very good position when you hit those golden years.
And remember, when it comes to allocating your retirement savings, having a partner like Smart401k to help with your investment decision-making process can be invaluable. So get started today and contact us if you have any questions at info@smart401k.com or 877.627.8401.