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Getting to Your Sandy Beaches: Realistic Retirement Planning

Retirement planning doesn’t have to be something that costs you a Sunday afternoon. Take a few minutes to work through your retirement needs and build a plan that will get you there.

Retirement planning is a mystery for a lot of people. Nearly half (39%) of households admit to not having a formal plan. While you probably don’t need to map out a plan to every dollar you’ll need in retirement, you do need a plan. Avoid the subject and you risk becoming one of the 4.2 million Americans over the age of 65 living in poverty.

That number isn’t meant to scare you but it should open your eyes a little if you haven’t thought about what life will look like in retirement. This article, the third post in our 5-week personal finance fix, will focus on the retirement planning and what you really need to know for your sandy beaches and little umbrella drinks.

Week One: Setting financial goals and how to make a budget you can keep
Week Two: Investing Basics and Beyond

What Does Retirement Planning Look like for You?

I think a lot of people put off retirement planning because they see no real need to start. It’s likely more than a decade off before most of us can tell our boss what to do with his weekly efficiency reports. Besides, if you are already putting money away in an investment account, what more is there to retirement planning?

Quite a bit as it turns out. While having an investment account is a good start, you really don’t know how much you’ll need or how to get there until you really think about what retirement will look like for you. Who knows, after actually mapping out your retirement plans you might find that you’ve got a little extra in your current nest egg. Party!

Remember: Simply saving money and investing isn’t retirement planning.

What does retirement planning look like for you? Ask yourself a few questions:

  • Where do you want to live? Obviously this will affect your cost of living and maybe how much you will spend annually for travel. Retiring to those sunny beaches might sound great until you consider the cost of travelling to visit grandchildren.
  • Do you enjoy travelling, how much and where to? There are a few places on my bucket list (Hong Kong, Moscow and Egypt) and I would like to take the occasional road trip around the United States. These trips are not going to be cheap.
  • What do you enjoy doing for a hobby? I work so much that I haven’t really practiced a hobby regularly. I like to play pool and would probably do that more often in retirement.
  • What gives you a sense of purpose in your life? This is a big one and unexpected for a lot of people. Much of our lives revolve around our career and some people fear losing that sense of purpose in retirement. Retirement planning is just as much about thinking about what your goals and direction will be during retirement as it is figuring out how to get there.

For myself, I cannot imagine not doing some amount of writing or investment analysis on a weekly basis. I enjoy my work and am fortunate enough that I’ll be able to do it well into my later years, if only at a more relaxed pace. Turning their hobby into some kind of a part-time paying job is probably the biggest question I get from readers and one of the best ways to think about retirement. Planning out how you can turn what you enjoy doing into something that will help you relax financially can be a great way to look forward to retirement.

If you’re not sure how to turn your hobby into a side-gig, check out this post on making money freelancing and nine websites to help you do it.

realistic retirement planning investingRetirement Planning: How Much Do I Need?

How much will you need to retire is likely the first question you ask even before knowing what retirement might look like. With an idea of what you’ll be doing in retirement, you can start to look at costs and how much you’ll need.

Your cost of living and what you want to do in retirement will have a lot to do with how much you’ll need. The general rule of thumb is that you’ll need about 80% of your pre-retirement income but expenses can change as you get older. The biggest difference is that you will no longer be saving for retirement but you will also probably be paying less in taxes and not supporting your kids. Some other expenses you might not have:

  • Mortgage payment
  • Transportation to work
  • Work-related clothing
  • Income taxes

While you may plan on traveling more, you may be able to take advantage of discounts by traveling during off-periods that you weren’t able to schedule previously because of work. You may also be able to snag some senior discounts for a lot of entertainment expenses.

Of course, one of the largest and most uncertain expenses in retirement planning is medical care. Budgeting out your expenses in retirement means checking out how much your employer is currently paying to your health insurance and making sure you can cover it. Fidelity estimates that a recently retired couple will need approximately $220,000 of their nest egg to cover their future medical expenses.

The Bureau of Labor Statistics regularly updates its consumer expenditures survey to measure how much people spend on different categories. While your own spending will vary, it can be a good way to gauge how your spending might change in retirement. Notice that while spending for people 65 years or older decreases, spending for some items increases or becomes a larger part of their total.

Retirement Planning and Spending

Retirement Planning and Spending

Motif Investing offers some useful retirement planning calculators as well as one on college savings and investing. You put in your age, current retirement savings and planned expenses in retirement and the calculator will show you how long your retirement savings will last. It’s a great calculator because you can play around with different items to see how they affect your retirement planning.

It’s important here to talk about setting realistic goals for your retirement planning. If you come to your retirement number and then find that you must either save more than 20% of your income or earn a return of more than 9% annually to get there, you may need to reevaluate what retirement will look like. Trying to save too much or earn outsized returns are two of the biggest reasons people fail in their retirement planning.

Saving more than 15% of your income for retirement is unrealistic for many people. Living well in your golden years is one thing but not if it requires a lifetime of living on pennies. Trying to save too much without enjoying life is a quick path to burnout and it’s likely you’ll end up withdrawing retirement money and paying heavy penalty fees.

Worse than trying to save too much for retirement is aiming for unrealistic returns. A retirement portfolio should have a mix of different assets like stocks, bonds and real estate. Over the twenty years to 2013, real estate and private equity funds have both posted average annual returns around 11%, followed by stocks (9.5%), bonds (6.5%) and commodities (4.0%).

The percentage of each in your retirement portfolio will change as you get older and your tolerance for risk decreases but even an aggressive mix weighted to stocks and private equity should still include bonds and will probably produce an overall return of 7% at best. As you transition to safer bond investments in the last decades to retirement, your average return will likely drop to around 5 percent or lower.

Aiming for super-high returns by overweighting risky investments is going to leave you at the mercy of the stock market and may wipe out your retirement savings right when you need it most.

How Do I Get There with Retirement Planning?

Without a doubt, the best advice you can get for reaching your retirement needs is to start early. The chart below shows the monthly savings needed to grow your retirement savings to $1 million by age 65 at an annual 6.5% return. Even starting as early as 30 years old and you’ll have to deposit more than $600 a month. Now consider that many will need more than a million to live comfortably in retirement and 6.5% may be an aggressive assumption for returns.

Cost of Waiting for Retirement Planning

Cost of Waiting for Retirement Planning

Meeting your target for financial security in retirement is a combination of setting realistic goals and picking the right investments. Investing for retirement is much more about asset allocation and getting free money than it is being lucky picking stocks.

The table below presents a possible plan for asset allocation by age. Notice the heavier allocation to riskier investments like stocks and alternatives in the earlier years before shifting to safer bonds later in life.

Retirement Planning and Asset Allocation by Age

Retirement Planning and Asset Allocation by Age

Many people plan on social security as part of the money they will need to live in retirement. I’m not an alarmist and do think the government will hold up to at least some of its promise when I turn 67 in 29 years but am not counting on SSI benefits to pay for retirement.

First, social security really doesn’t pay that much anyway. The average benefit is just over $1,100 which may cover a few expenses but certainly won’t be enough to live on. Second, I plan on entering semi-retirement well before I am able to draw full benefit from the government.

If someone walked up to you and offered you free money, would you take it? You bet you would! But then why do so many people not take advantage of the company match on their 401K plan? These company-sponsored retirement plans continue to be the best way to save for your retirement and offer some great advantages.

  • Your own contributions come out of your paycheck before taxes. If you are in the 28% tax bracket, that $100 contribution really only cost you $72 because you would have paid the rest to Uncle Sam anyway.
  • Most companies offer some form of matching. Even if yours is only offering a 50% match, it’s free money. You are going to need to live on something in retirement and you need to save for it. If someone is offering to help you do it, let them.
  • The profit in your 401K is not taxed like your other investments.

“But I can’t touch the money until I’m almost 60 years old. I want control of my own money!” The Federal Limit for annual 401K contributions is $18,000 and your employer may only match up to a certain point. Max out your company match and have control of the money beyond that amount. Not taking advantage of free money is lunacy.

The graphic below compares the end value after 30 years for a 401K plan and a normal investment portfolio. Contributing to the 401K option means an ending value nearly three times higher by age 65 given the assumptions in the graphic.

401K contributions and retirement planning

401K contributions and retirement planning

 

Still want to “control” your money? To reach the same value in your taxable investment portfolio ($665,219) and given the assumptions, you would either need to work until you are 79 years old or boost your contribution from 6% to almost 17% of your income. Please, take the free money!

By knowing what retirement looks like for you, setting realistic goals and a plan for how to get there, there is no reason why you would fail to reach those goals and enjoy your retirement years. This post isn’t meant to be an exhaustive guide to retirement planning but it should get you started and includes the most important points to consider.

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Joseph Hogue, CFAAbout Joseph Hogue

An investment analyst by profession, I run two blogs (Crowd101 and PeerFinance101) in personal finance, peer lending and crowdfunding. I've been on both sides of the table as a lender and a borrower and am excited to be a part of the peer movement. With the power of the internet, people are helping other people manage debt and raise money in ways never before possible.

A veteran and Iowa-native, I now live in Colombia with my wife and son. Like so many people, I was once trapped into the money myth and what it means to be successful. After taking control of my finances and learning how to make money in a job I love, I found a level of financial freedom that just has to be shared.

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