3 Easy Steps To Saving Enough Money For Retirement

The following is a guest post by Todd R. Tresidder, founder of Financial Mentor.

Retirement planning doesn’t have to be difficult.

It’s not rocket science.

In fact, just getting the basics right is often good enough.

Unfortunately, most people don’t get the basics right. According to the Employee Benefit Research Institute Retirement Confidence Survey less than 42% of employees have actually calculate how much to save for retirement. The research also shows how this very simple action greatly increases your chances of achieving your retirement savings goals.

 

Below we’ll look at the 3 essential action steps you need to complete so that your retirement plan is on solid footing…

Calculate Your Retirement Needs

The starting point is to calculate how much money you will need for retirement. Don’t worry if you have no idea how to complete this step because online retirement calculators make it simple.

Start by using your favorite search engine to locate a retirement planning calculator to your liking. The next step is to prepare the basic numbers you will need to complete the calculation – your spending budget in retirement, expected pension benefits, and current savings balances. After pulling all this information together it’s easy to plug these numbers right into the calculator and determine your retirement savings needs.

Don’t worry about perfecting all of these estimates or getting your numbers exact. It’s more important to work with a ballpark estimate rather than get stuck in perfecting the details that may stop you from completing the task. Just get this step done to start off in the right direction and work on perfection later once you’ve developed forward momentum.

Set Your Savings Goal

Now that you’ve determined how much you’ll need for retirement, the second step is to subtract your current savings from that number to create your new savings goal. For instance, your retirement number is $750,000 and your current savings balance is $350,000. That means your new savings goal is $400,000 (the difference between the two amounts).

This number may look daunting at first glance so it is better to break down your total savings goal into yearly or monthly amounts to make it feel more attainable. In other words, retirement savings is a big elephant, and the best way to consume a big elephant is one bite at a time.

For example, using the figures above and assuming you have 20 years until your retirement date, you will need to save approximately $20,000 per year. This is far easier to digest than $400,000. Similarly, you can take it a step further by dividing your yearly savings goal by 12 to determine your monthly savings goal. ($20,000 divided by 12 will give you a monthly savings goal of $1,667 to reach $400,000)

The calculations given above could either include or exclude investment growth or inflation. There are 2 ways to crunch the numbers to get your monthly savings goal, and they’re both acceptable:

  • The complicated route is to add in return on investment capital thus decreasing the savings requirement; however, you would also need to adjust your savings and spending budget for inflation thus offsetting much of the return on investment. In the end you won’t significantly increase accuracy because these 2 factors greatly balance each other causing unnecessary complication unless the time horizon is more than 20 years.
  • The simple route is to ignore the effects of inflation and return-on-investment on both savings and spending requirements thus tracking everything in nominal dollars. This is reasonably accurate for shorter time horizons but should be avoided when time horizons are longer.

Although the simple method isn’t as accurate as the more complex version, the truth is your estimate will only be as precise as your assumptions about return on investment and inflation anyway.  Given that neither of them can be accurately estimated for the next 20 years it is acceptable to use either method just to ensure you’re in the ballpark and going towards the right direction.

Again, the critical factor to success is to get started right away because procrastination is far more expensive than inaccuracies in your estimates. Focus on your goal and move forward by taking meaningful action without getting stuck in perfectionism. Details just cause complication and confusion. A confused mind doesn’t take action.

I suggest that you keep it simple for the time being so you can get started now. There will be plenty of time later to make adjustments in your calculations once you’ve established forward momentum. Precision is good, but getting started now is more important.

Create A Plan To Achieve Your Savings Goal

Once you know how much money you need for retirement and have a savings goal, it is time to create a plan to achieve that goal. A goal without action is just a dream so you must have a plan to produce the results. Below are various low-pain ways to help you meet your retirement goals:

  • You can increase your monthly contributions if your company offers a retirement savings plan. Make sure to save enough to qualify for the employer match when it is offered because it’s free money.
  • You may extend your retirement date by a few years to bump up your pension benefits and retirement savings while reducing your monthly savings burden.
  • You can build an additional source of income. Consider creating a “lifestyle business” that you would enjoy operating during retirement. This can dramatically reduce your savings needs.
  • Consider designing a different retirement plan to reduce your savings needs. For example, you could move to a more affordable area to lower costs, or you could work part-time as a consultant thus increasing income during retirement.

All the actions above will narrow the gap between the amount that you should have saved according to the retirement calculator and the actual amount in your savings account. You are limited only by your ingenuity.

In Summary:

The key to getting started with retirement planning is to keep the process simple. Complexity breeds procrastination. In the early years it’s more important to begin immediately than to get overwhelmed with unnecessary detail. This simple 3 step process will point you in the right direction:

  1. Calculate how much money you need to retire. Accuracy is not a priority. What is more important is to get a general direction so you can take action.
  2. Set your retirement savings goal and break it down into yearly and monthly savings goals so that it’s less intimidating.
  3. Finally, develop your plan to achieve this savings goal either by increasing your contributions to your company retirement plan and/or by finding ways to increase your income.

Follow this simple 3 step model and you will be on the right path to saving enough money for retirement. The earlier you begin the easier your goal will be to achieve.

About the Author:

Todd R. Tresidder provides financial coaching at http://financialmentor.com/financial-coaching and has been featured in numerous publications including the Wall Street Journal, SmartMoney magazine, Investor’s Business Daily, Yahoo Finance and more. His research into the 4% Rule and Safe Withdrawal Rates In Retirement was awarded publication in the prestigious academic peer review Journal of Personal Finance. He is an avid skier, cyclist, runner and father of two.

21 Responses to “3 Easy Steps To Saving Enough Money For Retirement”

  1. Rob

    Oct 24. 2012

    Very good article, but the one point I would add is the importance of paying yourself first, there usually isn’t much money left at the end of the month, best is to put savings away first

    Reply to this comment
  2. farcodev

    Oct 24. 2012

    Planning in such longterm is always a difficult task, too much variables are in stakes. But I’m happy to see that my model gives about the same result than the calculator.

    Very interesting article, thank you!

    Reply to this comment
  3. Poor Student

    Oct 25. 2012

    I haven’t got a firm number in my mind for my savings goal because I have not had a chance to develop a good idea of what my future expenses will be. But when I think about my end goal I think of just the number and do not consider inflation or appreciation. It is a somewhat safe assumption that my investments will earn more than inflation (if they do not then there are bigger problems with which to deal) so by just using the end number it can only be a happy surprise when I see I did not need to save as much as I did. If I assume inflation to be too low or my returns to be too high my savings will be insufficient. And I always guess on the high end of the anticipated range to ensure the retirement I want, not just the absolute lowest number on which I think I could retire.

    Reply to this comment
    • Todd Tresidder

      Oct 27. 2012

      Those are all good points consistent with the article. Keep the process simple so it is actionable and correct and adjust with fine tuning as you get closer to achieving your goal. You are way ahead of the pack just by getting started.

      Reply to this comment
  4. You hit the nail on the head! The believe the first thing individuals/couples need to do is calculate their retirement needs and means figuring out what it is you want. I have had painful conversations with my parents about their upcoming retirement. They have flip flopped back and forth about putting their money in this investment vehicle or with this investment firm. I had to tell them firmly that before they make any particular investment they need to figure out what it is they want, how they want to live and where they want to live.

    Reply to this comment
    • Todd Tresidder

      Oct 27. 2012

      It is such a simple question – “what do I want?” It is also one of the most powerful when I ask it regularly and closely pay attention to what is inside of me. Another really interesting related question is “what am I tolerating?” This is the mirror image question showing what you want through the back door by experiencing what you don’t want. Together they act like a compass guiding you toward your dreams and goals keeping your life on track and heading in a positive direction.

      Reply to this comment
  5. Good post! Everyone should have an idea of how much they will need. It’s hard to extrapolate when you are young and single but still, it’s good to have a ballpark figure.

    I find that understanding what you will need is really the key. Many calculators put a percentage of salary or a fixed amount and it usually turns into a large amount. As I got tired to see a crazy amount :), I build a spreadsheet to help track my monthly expenses in retirement as just the basic requirement of life. You’ll be surprise to see that it’s not cheap.

    Reply to this comment
    • Todd Tresidder

      Oct 27. 2012

      Yes, the math is quite fascinating when you dig deeply into it. Even though the Rule of 25 is only a rough approximation, it is also useful and practical. It says you will need 25 times your first year of spending in retirement. Some people prefer 33. Either way, the interesting insight from that is for every $1,000 per month less you spend in retirement it means $300,000 less required in annual savings! So your intuition is on target. Understanding and controlling expenses is a critical component to the equation.

      Reply to this comment
  6. Brian Poncelet,CFP

    Oct 27. 2012

    The points about creating a plan is excellent, without a plan it is hard to go anywhere.

    The 4% safe withdrawal does not make sense though. Annuities for example even in this low interest rate environment are over 6.6% for males over 65 guaranteed for life with very little taxes owed.

    Reply to this comment
    • Todd Tresidder

      Oct 27. 2012

      Your point is excellent. It is fully addressed in both of my books linked within the article. I’m not a fan of the 4% rule with the exception that it is an interesting approximation for rough, over-simplifed planning. However, it is not a practical solution to be implemented in practice. Hope that clarifies.

      Reply to this comment
      • Brian Poncelet,CFP

        Oct 30. 2012

        Hi Todd,

        In your discussions you get into “risk management” (insurance)?

        Cheers,

        Brian

        Reply to this comment
        • Todd Tresidder

          Oct 30. 2012

          I’m a big believer in risk management; however, insurance is only one of many forms. There are many other risk management practices that are not “products” sold but practices or processes instead. Hope that helps.

          Reply to this comment
  7. David

    Oct 28. 2012

    Just want to add, in line with reducing your expenses, its very important to have your mortgage paid off before you retire. Very rarely do I find this mentioned in retirement articles, perhaps because most assume this is something that will already be handled. But, if you reduce your expenses, then that also reduces the amount of savings you will need to accumulate. In the US our biggest expenses are often mortgage and car loans, so if we are able to do away with those two before we retire, then we are so much better off. You cant eliminate all your expenses, just as you probably cant create enough income to cover your entire working salary, but if you work on doing both, you should be ok. Great article though:}

    Reply to this comment
    • Todd Tresidder

      Oct 29. 2012

      Yes, debt reduction in all forms thus reducing monthly cash outflow is always a positive. It also increases security should adversity strike.

      Reply to this comment
  8. Martin

    Oct 30. 2012

    Thanks for the tips on how to create a plan. I always tried but it felt so away and unrealistic to me that I always failed. Breaking it down into monthly tasks can help. I was also thinking on using leverage on investing during beginning phases of building my portfolio lets say for the first ten years and then start de-leveraging for the next ten years.

    Reply to this comment
  9. The Dividend Ninja

    Oct 30. 2012

    Todd, I really appreciate you taking the time to respond to everyone’s comments. :) Great article as well, thanx again!

    Cheers

    Reply to this comment

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