By Steve Jacobs
Retirement is the big finish line at the end of a long race. Like with any race, the better prepared you are the better the outcome.
Throughout their years of employment, many people take advantage of the myriad options available for tax-free or tax-deferred saving. The big question these preretirees may find themselves asking while creating these recurring deposits is, “How much is enough to be putting away at my age?”
We’ll just say it up front here: There’s no answer to that question or at least no simple answer. Several studies have approached this subject over the years, and they mostly determined there are too many variables to set a hard-and-fast rule.
For example, it doesn’t make sense to look at this as a total dollar amount, because spending and lifestyle during working years can vary dramatically from person to person.
Some studies base their recommendations on a savings rate throughout the accumulation phase, based on what you earn. But factors like salary, which can be variable, and lifestyle spending (again) make it difficult to pin down an answer to how much you should put away each decade you’re in the workforce.
That being said, there are certain guidelines that make planning easier.
Morningstar takes a crack at answering the question here. These figures predict gains using Monte Carlo theory, which is commonly used for retirement: You look at historical stock and bond returns and put all the rates in a hat (metaphorically speaking — it’s more complex than that) and mix it up. You then pull out a bunch and use those to predict the returns. The math is surprisingly good.
Financial experts reliably use Monte Carlo theory to know mathematically what people should be doing to save for retirement. Of course, no one can predict what the market’s going to do, but these remain fairly accurate long-term trends.
None of this matters if you don’t save enough — many people don’t due to debt, obligation or other reasons. Like with all races, the most important step is the first one: actually putting money away and not burying your head in the sand.
“I’m always afraid of people using a calculation like this and seeing a number that’s so large that they become depressed and forget about it,” says Robert Steen, Advice Director for Retirement and Complex Planning at USAA. “These are rules of thumb. Ultimately, whatever you can do and save, if you can stick to it and take the appropriate risk, that is the key.”
One thing is certain in all of this, though: “Your lifestyle spending in retirement is generally lower than pre-retirement spending, overall,” says Steen, who calls that a good thing. “If you earned $80K gross in pre-retirement, you’re not going to be paying payroll taxes, you won’t be saving toward retirement and you may not have other employment-related expenses.”
With this information in your back pocket, visit USAA’s Retirement Center and start planning for your retirement today.
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