“I'm starting a bit late planning for retirement, and I am trying to figure out what I need to start saving. How do you recommend getting started?”
I recently received a message similar to the one above from a friend, and with his permission, I’m sharing his question and a brief recommendation.
This is a common concern. The good news is it’s never too late to get started. Less than 40% of Americans begin saving for retirement in their 20s.
Here are three quick steps you can take to get started:
Step 1: Calculate last year’s spending.
Start by finding your account balance from 12 months ago. Add the total amount of deposits to that number, and subtract your current account balance to get the amount you’ve spent in the last year.
For example, if your account balance was $5,000 12 months ago, your current balance is $12,000, and deposits into your account were $100,000, subtract $12,000 from $105,000 ($105,000 - $12,000). The total amount spent is $93,000.
Step 2: Estimate your monthly needs during retirement.
Using your current spending as a guide, determine what you need on a monthly basis during retirement. Don’t worry about being exact, a rough estimate is still useful. Include housing expenses, food, transportation, health care, and other living expenses.
Step 3: Identify your gap number.
Your “wealth gap number” is what you need on a monthly basis subtracted by the amount of monthly income/distributions you’ll receive. Your gap number is what you will need to generate through your retirement planning efforts in order to retire.
For example, if your monthly gap number is $300, you will need an additional $3,600 per year. Divide this by a reasonable distribution rate (example: 4%) to estimate what you should set aside to help bridge the gap. $3,600/4% (0.04) = $90,000.
Retirement planning is complex, but having a rough idea of your gap number will start a productive conversation with your financial advisor.
Resources: