Saving for retirement can be difficult for many reasons.
Pair the uncertainly of prognosticating the future with the need for delayed gratification (saving your hard-earned money rather than spending it), and it’s easy to understand why so many people fail to save enough. In fact, studies have suggested that 1 in 3 Americans have zero dollars saved for retirement.
What is scary is that this isn’t an isolated demographic that has failed to adequately prepare. It’s widespread. Here are a few quotes from the same study to illustrate the point:
- 42% of Millennials have not begun saving for retirement.
- 52% of Gen Xers have less than $10,000 saved for retirement.
- Only 1 in 4 Baby Boomers has more than $300,000 saved for retirement.
These figures beg the question: If the survey respondents knew they weren’t saving enough for retirement, would they do anything different?
Better yet, would you?
Would you bury your head in the sand and punt the problem to a later date? Or would you be willing to find a way to save more now, knowing well that saving more now may mean giving up something that you currently spend money on?
The first part of this retirement planning process is to understand whether you’re on track for retirement or whether you are lagging behind. Fortunately, a simple answer to this question can be determined by clicking here*.
Here is a list of the five questions you’ll need to answer.
1 – Your Age (and your spouse’s age, if you’re married)
Easy enough! Good. You’re on your way.
2 – Your Household Income
Use your gross household income. Gross income is the total amount that your employer pays you every year. Do not take any deductions for 401(k), healthcare expenses, taxes, or anything else. If you are looking at a W2 from the previous year’s tax return, use the Medicare wages.
For those who are self-employed, use net income after expenses. Add up your revenues, deduct expenses, and plug in a number. Looking at a tax return, you can use the net Schedule C figure.
If you have other forms of income that you believe are relevant, feel free to add these too.
3 – Your Monthly Expenses
Your monthly expenses will be used to calculate the basic retirement projection.
In order to calculate your monthly expenses, you will want to include both fixed and variable expenses. Fixed expenses include things like a mortgage and a car payment. Variable expenses include expenses like vacations, clothing, eating out, etc.
The more accurate you can be with your expenses, the more accurate those retirement projections may be.
For expenses that occur less frequently than monthly, you may need to translate them into a monthly figure. For example, if you have an insurance bill that is $3,600 per year, you can assume $300 per month ($3,600/12).
For expenses that go away in retirement (i.e., a mortgage that is paid in full), make no adjustment. We are simply looking for a guideline projection of a retirement plan.
4 – How Much You Save for Retirement Each Month
One of the more common ways to save for retirement is through an employer-sponsored plan, often a 401(k) plan.
For this question, calculate how much you’re saving each month into the plan. For example, if you make $150,000 per year and contribute 10%, this is an annual contribution of $15,000. Divide this by 12 months, and the monthly contribution is $1,250.
In addition, you can add the company match. If the match is dollar for dollar up to 6%, you can add another $9,000 per year, or $750 per month.
Other places you may be saving for retirement are individual IRAs or non-IRA brokerage accounts.
Add your monthly savings into these accounts to the retirement plans above for a total monthly savings.
A hypothetical example may look like this:
- Spouse 1 401(k) – $1,250
- Spouse 1 match – $750
- Spouse 2 – 401(k) – $500
- Spouse 2 match – $0
- Non-IRA brokerage – $1,000
- Total Monthly – $3,500
5 – How Much You Currently Have Saved for Retirement
Finally, you will need to add together your total current retirement savings. This should include all investments that are specifically earmarked for retirement.
Again, a more common retirement savings vehicle is a 401(k) or other employer-sponsored retirement plan. You’ll also want to include retirement plans from previous employers, if any.
Other retirement vehicles may include traditional IRAs, ROTH IRAs, and non-IRA brokerage accounts. For those with incentive stock options, non-qualified stock options, restricted stock, or other employee stock plans, you should also include these values.
At the end of the report, you will receive a calculation that illustrates a very simplified retirement plan. Simple, in this case, is good. The goal of this software is to answer the key question: Am I on track to retire or not?
For the record, this is not intended to be a perfectly optimized solution that best addresses your asset allocation, your retirement savings strategy, efficient retirement withdrawals, or any tax or “what if” planning. These questions need to be answered with a much more detailed discussion.
First, click here to take the test*.
Next, let’s go back to the original question.
What if, after taking five minutes to test your retirement plan, you find out that you aren’t on track? Are you willing to do something about it? Are you willing to commit to a real change?
Because if not, when will the right time be? Start today to protect your tomorrow!
* These calculators are provided only as general self-help planning tools. Results depend on many factors, including the assumptions you provide. We do not guarantee their accuracy, or applicability to your circumstances. Results may vary with each use and over time