A woman wondering if she has saved enough for retirement

For many folks, retirement planning comes down to their personal “number,” the savings level at which you can leave work behind and relax in a folding chair on a beach.

That milestone number for many of us seems to be $1 million. If we can get to $1 million in the bank, well, that’s plenty enough to retire — or so the thinking goes.

In fact, the number that should drive your retirement planning is not how much you have but how much you expect to spend in retirement, including unexpected future expenses.

Of course, these numbers are hard to know.

Many people don’t know how much they spend month-by-month today, much less for a future date decades away. Plus it’s nearly impossible to guess what might go wrong with your health later in life, your housing situation, or any number of economic events over which no one has control.

Uncertainty is scary and frustrating for sure. But there are ways to estimate likely outcomes and begin to formulate a plan.

It starts with doing a real budget today. A financial planner can then be a big help in setting reasonable expectations about your future cost of living.

Rules of thumb

If you’re just not a budget person, consider starting out by using the Fidelity Investments “retirement rule of thumb.” It goes like this:

Aim to save this amount of your salary by this age:

  • 30 — One times your salary
  • 35 — Two times your salary
  • 40 — Three times your salary
  • 45 — Four times your salary
  • 50 — Six times your salary
  • 55 — Seven times your salary
  • 60 — Eight times your salary
  • 67 —Ten times your salary

This rule works because it scales your target savings amount according to your actual salary and thus, it’s presumed, your real spending needs.

The salary rule of thumb model has the added benefit of helping you set an achievable savings rate to meet your goal. Fidelity assumes a 15% savings rate beginning at age 25, invested more than half in stocks, and assumes your cost of living stays the same in retirement. 

Your starting point might vary. Here again, a financial advisor can help you adjust your assumptions.

Another popular way to create a retirement goal is the famous “4% rule.”

Created by a financial advisor decades ago, this rule argues that a retiree should be able to remove 4% of his or her invested portfolio balance annually and never run out of money, thanks to growth of the portfolio itself.

For instance, if you have $1 million and it’s prudently invested, the 4% rule suggests that you can take out $40,000 a year and never go broke. Add to that your Social Security benefits and it’s easy to imagine a comfortable retirement lifestyle.

Planning first

Of course, all of this leaves out some pretty significant variables. Will you have your mortgage paid off? Do you plan to travel extensively? How is your health? Will your investments compound over time as you expect?

Increasingly, too, investment advisors warn that the 4% rule is outmoded thanks to the historically low fixed-income yields.

For instance, some suggest that 3% is now a more achievable target. Having a properly managed investment portfolio and a strong financial plan to back it up is a must.

Financial planners often talk about what’s known as the “retiree spending smile.”

Many new retirees engage in a flurry of extra spending early in their retirement years. They tend to travel more in the first five to 10 years, update their vehicles and splurge on kids and grandkids.

The spending spree eventually dies down. Fewer needs seem so pressing and life goes on at a predictable pace for years. 

Then, later in retirement, health costs creep upward. Higher costs early and late create the upturned ends of the “smile” pattern of spending in retirement.

It’s not impossible to know if you have saved enough for retirement. The trick is to adjust course as you live your own financial reality, year-by-year.

A qualified financial planner can help you create a plan that smooths out that “spending smile,” making it much easier to manage your income and live well in retirement.

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