A study by the Center for Retirement Research at Boston College concluded that Americans need to focus more on investment savings. It revealed that as of 2009, 41% of early Baby Boomers, 48% of late Boomers and 56% of Gen-Xers were at risk of not saving enough for retirement. What that means is that many will not be able to maintain their lifestyle in retirement. Do you fit into this at-risk category? To find out, you’ll need to do some work. You have to figure out what income you will need in retirement. This is not as easy as totaling what you are spending now, because your needs in retirement may be quite different. Start by creating a spreadsheet of your current annual expenses. Then figure which ones will still be there when you retire, and think about some new ones that are not now on the radar. Adjust for inflation.
Your annual income in retirement will potentially come from Social Security, pensions, and your savings. Each year, Social Security sends you a statement that gives you expected benefits at various retirement ages. Add to this any income that is assured: pensions, annuities, etc. The balance must come from savings.
A Trinity study that was updated in 2009 determined that if you withdraw 4% annually from your savings starting at age 65 and adjust for inflation in each subsequent year, you have a 95% chance that your savings will last through a 30-year retirement. This assumes that your savings are invested 50% in stocks and 50% in bonds. So, for every $1,000 you need in annual income, you will need $25,000 in savings.
What was the annual retirement income that you need to generate from savings? Take that and multiply by 25 – that’s the amount of investment you would need at retirement.
If your savings are in a traditional retirement plan on which money has been accumulated pre-tax, all withdrawals will be taxed as ordinary income. Be sure you have accounted for this expense. If your money is in a Roth IRA, you will have paid the tax up front, so withdrawals come out tax-free. Savings in a taxable account will be taxed on capital gains, interest and/or dividends.
If your eyes have glazed over by now, you may want to seek professional financial help. Whether you do it yourself or with the assistance of an outside advisor, it’s important to determine your financial needs in retirement to be sure you’re saving enough.
What questions do you have about saving and investing for retirement?