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.
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:
- 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.
- Set your retirement savings goal and break it down into yearly and monthly savings goals so that it’s less intimidating.
- 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.