Getting Ready to Retire?
Retirement: How do you Know You are on the Right Track?
By Niki Mullinix and Mindy Zatta
Mosaic Wealth Consulting
Retirement savings progress can be difficult, and investors often rely on rules of thumb to assist them. But how do those rules stack up against reality?
Most big financial decisions require us to accept some uncertainty, to balance competing needs and impulses. So it’s not surprising that we’re quick to embrace financial rules of thumb—those nice round numbers that tell us how much to save, how to allocate our portfo- lios and how much life insurance we need.
But while these guideline numbers can be useful in kick-starting the financial planning process, the truth is that they simply don’t apply universally. They’re meant to be rough estimates—starting points that need to be carefully adjusted to individual circumstances.
The problem is that rules of thumb can some- times be mistaken for actual rules and not guidelines. When that happens, investors can make decisions they think are informed but end up impeding their long-term goals.
The key is to understand not only the general rules but also their limitations. Here’s the thinking behind some of the most common guideline numbers—and how to use them.
10%: HOW MUCH OF YOUR INCOME YOU SHOULD SAVE FOR RETIREMENT ANNUALLY Generally speaking, this is a solid guide. But it’s important to remember that your particular circumstances may require more or less -- you don’t want to sacrifice comfort now if you’re not going to end up enjoying it later. Remembering your savings goal as a percent- age means it automatically adjusts as your income changes. On the other hand, many people need to save more than 10% to ensure a comfortable retirement—especially those without workplace retirement plans.
80%: THE AMOUNT OF YOUR CURRENT INCOME YOU’LL NEED IN RETIREMENT Conventional wisdom has long said that your income needs will decrease once you’ve paid off the mortgage and put the kids through college. But this is not necessarily true. Many people don’t adjust their lifestyle at all and, in some cases, spend more on things like travel, vacation homes or opening a passion-based business. To be safe, you should count on spending the same amount in retirement as you do now.
5%: THE AMOUNT OF YOUR PORTFOLIO YOU CAN WITHDRAW ANNUALLY This rule of thumb is intended to prevent you from running out of money in your lifetime. In this case, the rule is basically sound. But those following this rule should keep a sharp eye on the markets and on their allocations and risk levels. If the markets go through a period of volatility and fall by 20% and you still withdraw 5%, you’ve just lost a quarter of the value of your assets.
$1 MILLION: THE AMOUNT YOU NEED TO RETIRE COMFORTABLY Saving is always easier when you have a clear target, and many people aim for $1 million. The number makes a certain amount of sense, but you shouldn’t panic or give up if you appear to be falling short. If you don’t make it all the way to $1 million, you can probably still enjoy a comfortable retirement, but you may have to adjust your lifestyle expectations.
SIX TO 10 TIMES: THE AMOUNT OF YOUR CURRENT INCOME YOU NEED IN LIFE INSURANCE COVERAGE This is generally a good guide, but you need to think carefully about where in that range you ought to be. If you’ve already put your kids through college, you may need around six, but if your kids are much younger, you should proba- bly be closer to 10. In the end, what matters most is your intent: If your goal is to ensure that your heirs are left with significant assets, you’ll want to set the amount higher than if you’re merely looking to cover your outstanding debts.
The content of this material was provided to you by Lincoln Financial Advisors Corp. or Lincoln Financial Securities Corporation for its representatives and their clients. For more information, contact Niki at Niki.Mullinix@lfg.com or Mindy at Mindy.Zatta@lfg.com