How can we make sure we are saving enough for retirement? I am 42 and my husband is 40.
Answers | 2
In my planning practice, I guide clients through a 'vision walk' which is basically a review of your goals through guided questions. And then we put some dollar amounts to those specific goals. You can begin by asking yourselves questions like: Where will we be in retirement? What do we want to do? How much do these things cost in today's dollars?
Then you can use an online tool or the help of a qualified financial planner to figure out what these costs may be adjusting for inflation over the time horizon. Depending on your risk tolerance and how much you can put aside, you can use online tools (or the help of an advisor) to project out what that future amount needed is and then work backwards.
While there are rules of thumb that investors hear about expecting your post-retirement living expenses to range from 60% or 80% of your pre-retirement expenses, I think that is way too simplistic. In my practice I'll use a variety of tools to 'stress test' different scenarios of income, expenses, inflation and investment returns. As part of this, I'll also go into modeling different retirement distributions. (A recent article from the Journal of Financial Planning went into just this very thing).
The number you're looking for is going to vary depending on your plan horizon (aka life expectancy). Although none of us has a crystal ball or an expiration date tattooed on us, there are ways to come up with a reasonable estimate of the planning horizon. I always ask clients about their family history of when their parents, grandparents or other aunts and uncles passed away. I combine this with questions about personal medical history. This can provide a decent measure.
For a more scientific approach, there are tools that individuals or advisors may use. There are online tools like Dr. Oz''s www.ShareCare.com (formerly www.RealAge.com). or www.Livingto100.com just to name a few. There's also the online tool from the folks who do this sort of thing for a living for insurance companies. You can find a simple life expectancy calculator from the Society of Actuaries here: https://www.soa.org/research/software-tools/research-simple-life-calculator.aspx .
Even with this number from one of these tools, you'll need to recognize that there is a strong possibility that one of you may live longer. So if available, look for the age where there is a 25%-30% chance that one of you will get to. Recent academic research alludes to this to be somewhere around 94 for a male and 99 for a female.
While nothing is really as simple as a 'rule of thumb' you may want to target paying yourself (i.e. saving) about 15% of your pre-tax income prior to retirement. And then an advisor can project out how this savings amount invested based on an asset allocation appropriate for your risk tolerance could perform over time.