How much do you need to save for retirement?
The financial industry’s answer to “How much is enough?” is usually a number. Input a bunch of numbers into a retirement plan or calculator and out spits a NUMBER – you need $2.8 million dollars to retire comfortably. Whether the number is $2.8 million dollars, $262,983.12 or some other mathematical outcome, the result is often a number that we have difficulty understanding. The number may not give us a magic solution. Instead, it just creates more questions like how much income will that pay me? When will the money run out? How do I invest my money to get that amount when I retire? And even is that really enough?
Retirement is not a number.
So how much do you need to save? The question might best be answered with a question “What do you need?” Maybe to understand how much you need to save requires an understanding of what you spend first.
What you need for retirement is best determined by understanding your spending. How could you figure out how much you need to save without knowing how much you are going to spend? You need to have some idea of what retirement will look like and attach a price tag to that lifestyle. What is your retirement price tag? Too many people have no clue what they are spending and as a result, they use simple rules of thumbs for their spending assumptions.
Knowing what you spend today can give you a sense of how you will experience the transition to retirement. Some people view retirement as the ‘dream’ of living a completely different life in retirement when for most people, retirement is actually an extension of the life they are already living. Learning how you spend is an indispensible trick to help ease you smoothly to retirement.
In my book, 10 Things I Wish Someone Told Me About Retirement, my colleague Tricia French offers some quick tips to help you uncover your spending behavior today.
- Watch Now – Track your expenses for 2 to 3 months and write everything down. This can take a little time but more importantly, it takes honesty. If you write it down, you will be more consciously aware. You will see what you are spending as it happens. This is a similar tactic with eating. If you write down everything you eat with the caloric values attached to it, it makes you more aware and can help you to recognize good behaviors vs bad behaviors.
- Look backwards – Another strategy is to gather two or three months of bank, credit card and line of credit statements. This takes only an evening – a little time investment yielding thorough results. Most financial institutions make it easy to access statements online. With the exception of cash withdrawals, you will have a precise itemized list of everything you have spent. Every debit or credit card expense is identified by what, where, when, and how much. Group your expenses by category and input them on your spending plan. Don’t forget bank service charges. The flaw of this method is the failure to track cash spending. Cash is easy to spend on the little things, like coffees and snacks, and you’ll likely have no receipt to show for it. Add up the cash withdrawals and categorize them as your “personal allowance”. Don’t be surprised if cash spending really adds up.
- Practice your future – Can you afford your current lifestyle on your retirement income? How would you know if you did not try? Calculate the difference between your net working income and your anticipated net retirement income. As for the challenge… stockpile the difference between your pre- and post-retirement incomes in a separate account every month. If you need to dip into that stash, then you have more decisions ahead, and luckily time to do so. If you can consistently bank the difference, while maintaining your lifestyle, you can expect a stress-free transition to your retirement budget.