No matter how old you are right now, you should be thinking about your retirement because the earlier you start saving for your “Golden Years,” the more comfortable those years will be for you. In order to create a retirement plan, however, you need an answer to the question “ How much do I need to retire? ” There is certainly no shortage of opinions on what it will cost you to live during your retirement years nor on formulas that will help you calculate how much you need to save each year. The plethora of “expert” opinions related to retirement planning can make the entire endeavor more intimidating than it should be. Ideally, you should consult with both your financial planner and your estate planning attorney during the creation of your retirement plan. For now, however, it may be helpful to gain a better understanding of the factors that will have a direct impact on how much you need to retire.
Traditional Retirement Planning No Longer Works
Most likely, your parents’ and/or grandparents’ retirement planning consisted of nothing more than waiting until they reached retirement age so that they could start collecting Social Security retirement benefits along with their pension from the company where they worked. Those days are gone forever. The future of the Social Security retirement system in the United States is unsure. Even if we assume that the system will survive, your Social Security benefits will not go as far as they once did. Once upon a time, a retiree could actually live fairly comfortably on his/her Social Security retirement benefits, particularly if those benefits were supplemented with a decent monthly pension. Those days are long gone though. As of 2016, the average monthly Social Security retirement benefit is just over $1,300 – hardly enough to cover a mortgage, utilities, and insurance, much less food and other necessities, for the average retiree. Moreover, as the concept of “lifetime employment” also goes by the wayside, pensions are also becoming more and more rare. Therefore, retirement planning in the 21st century must take a different, oftentimes more comprehensive approach. It also needs to start earlier when possible.
How Much Do I Need to Retire?
Estimating how much you need to save for your retirement is not an exact science which is why one “expert” might suggest one figure while another “expert” suggests another figure that is not even close. What most experts do have in common however, are the various factors that impact how much you will need to save, including:
- Your estimated monthly expenses during retirement
- Your age now
- The age you plan to retire
- The value of your current assets and savings
One thing that everyone agrees on is that the earlier you start saving for your retirement the less you will need to save because your savings will compound significantly over the years. Consider the following example:
Assume that you start saving at age 25 by putting $3,000 a year in a tax-deferred retirement account. Assume further that you continue to save that same amount for the next 10 years, or until you reach age 35, and then you stop adding to the account. You have saved just $30,000; however, using a 7 percent interest rate, your $30,000 investment will have grown to more than $338,000 by the time you reach age 65.
Now let’s assume that you don’t start to save until you reach age 35. Contributing the same $3,000 each year until you reach age 65 – or 30 years – you might assume you will surely have more money saved than in the first scenario, but you would be wrong. Despite the fact that you would have saved a total of $90,000 of your own money under this scenario, it would only have grown to $303,000 — $35,000 less than if you had started saving just ten years and only saved for ten years!
The lesson learned from these scenarios is that the value of starting your retirement savings early is significantly more than you likely realize.
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding retirement savings, contact the experienced Massachusetts estate planning attorneys at Debruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.