If you think that the phrase “three key numbers to your retirement” has something to do with the lottery, think again. (Any lottery ticket with a jackpot that can affect your retirement plans will likely have six numbers.) The three numbers we are referring to have to do with your retirement cash flow.
Philip Moeller focused on three key numbers in a recent article in Money: the relative amount of your pre-retirement income that you will require to keep up your preferred standard of living during retirement, the relative amount of your current salary you will need to save/invest to meet that goal, and how much you can withdraw from your nest egg each year in retirement without outliving your money.
That is easier said than done, as all three numbers involve assumptions and variables that you have little or no control over. For example, you cannot know how long you are going to live (if you could, would you really want to know?), and you cannot predict economic conditions in the future.
Even so, it is important to set targets. People can get overwhelmed and not set goals, only to find that they have not bothered to save anything close to what they needed. The real key is to start saving as much as possible as early as possible, and use your estimates as a target.
While you will have to develop your own numbers, a study from The Center for Retirement Research at Boston College has given you a frame of reference. They found that middle-income earners should be aiming for retirement incomes that were at least 71% of their annual income in the working years. High earners should aim for at least 67%, and low-income earners should aim for 80%. Obviously, that varies depending on your retirement lifestyle plans, but it is a place to start.
Since Social Security fills some of that gap and covers a higher percentage of the income with lower income earners, the savings rate needed to fill the gap inverts. Assuming you retired at age 65 and started contributing to your savings at age 35, the average percentage of your pay you would need to save is 11%, 15%, and 16% respectively from low to high-income earners.
Those are difficult targets to hit. You can make a significant difference by starting to save earlier than age 35… and if it is too late for that, put off retirement until age 70.
Meanwhile, you need to decide how you will meter out the savings you eventually end up with. A rough rule of thumb is to start with no more than a 4% withdrawal of your nest egg in the first year of retirement. If that is an insufficient amount to meet your goals, you will have to reassess your desired retirement lifestyle.
Remember that you are setting guidelines and expectations, and no matter how well you plan, you are probably going to have to adjust along the way. You or your spouse may have health problems, the market may tank as you head into retirement... any number of potential drains on your resources may force you to alter your plans.
Of course, they could alter in a positive way as well. Your investments in the retirement years may yield greater returns than you expected, or perhaps you will find the six key numbers to your retirement with a winning PowerBall ticket.
We hope the latter is the case for you – but either way, plan well and be prepared to adjust.
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Winnie Sun is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Sun Group Wealth Partners, a registered investment advisor and a separate entity from LPL Financial.