Someday You will No Longer Work Full-Time
The reason may be that you are not physically or mentally capable of working full time. Or you may simply decide you don’t want to work for a full-time paycheck until the moment that you die. Even if you do plan to work forever, others may not want you to do so. I know several older people who were not looking to retire, but their employer saw this differently.
You are Likely to Live for 20 years After Working Full-Time
The average life expectancy in the United States is around 80 years old and is expected to continue to rise. Assuming that you live a healthy lifestyle and take care of your body, it is possible that you will live past 90 years old. Both my wife and I have grandmothers who are almost 100 years old.
Now is the Time to Prepare for your Later Years
Someday you will not longer work full-time. You are likely to live for 20 years after working full-time. You are going to have to have a way to survive financially after your full-time vocational life ends. Your preparation must begin now. The most important years for saving are your early years of employment. You can never get back your 20’s and 30’s. If you are in your 40’s, you must be actively and aggressively saving.
Get Started by Setting a Goal Financial Number
In preparing for your later years, the first step is to set a goal for the amount that you would like to have in savings by the time that you retire. Here are some steps to determine your goal number:
- Determine how much annual income you need in retirement
How much will you need each year in retirement to live? You may have your house paid off and not have to pay for college or weddings, but your healthcare costs are likely to be higher. A good rule of thumb is to plan on somewhere around 80 percent of your pre-retirement need. Let’s assume that you settle on an annual number of $65K. You are planning to bring in $25K from social security, so you need to draw $40K from your savings.
- Double that annual income number
Whatever annual number you came up with now has to be doubled. Why? Because of Inflation. Inflation is the “sustained increase in the general price level of goods and services over a period of time.”
Inflation means that things will cost a lot more in 20 years. The average historical annual inflation rate is just over 3%. Inflation causes prices to double roughly every 20 years. Here is what this looks like in recent history: 50 years ago, something purchased for $100 would cost $752 today. That’s 652% higher. 40 years ago, something that cost $100 would cost $440 today. That’s 340% higher. 30 years ago, something purchased for $100 would cost $220 today. That’s more than twice as much. If historical inflation holds true, in 20 years, one million dollars will only be worth $500,000. Your annual goal number has now gone from $40K to $80K
- Multiply your annual need times 25.
If your annual need was $40,000, you multiplied by 2 to get $80,000. Now multiply $80,000 times 25. You get 2 million dollars. That might sound scary, but that’s the number. Why will you need this much money? Because you can plan to withdraw 4% annually of what you have in retirement and expect your money to last 25-30 years. Here is a post that explains this in more detail.
How to Save the Amount you Need
Your goal is to save 2 million dollars by age 70. Now you need to figure out how much to save annually. To Determine how much to save each year, answer the following questions:
- How much money do you currently have saved?
- How many years do you have before age 70?
- What interest rate do you expect to earn? (I suggest aiming for 7%)
- Plug your answers into this calculator to determine how much to save monthly.
Where to Put the Money that you are Saving
There is no shortage of opinions concerning where to invest. Here are a few guidelines to consider: (I am not an investment advisor but am hoping to motivate you to educate yourself)
- Invest in your company 401K or 403B. Make sure to save enough to get any matching funds that your employer offers. Choose index or target date funds whenever possible.
- Max out your Roth IRA’s each year. You can save $5500 for you and $5500 for your spouse annually. (Consider setting up your ROTH IRA account at Vanguard or TD Ameritrade.)
- If you are just getting started, put your savings in an Equity Index, the Total Stock Market Index, or Target Date Funds.
- If you are willing to put in a little extra effort – read Paul Merriman’s articles on where to invest. Paul writes for Marketwatch and is rock-solid. Start here.
- Consider a Robo Advisor.
- Don’t Invest your savings with a guy in your church or a friend who is building his business just because he seems to be a nice guy.
My last piece of advice. Become an expert on this topic. You won’t regret it.
Investing a couple of hours a week growing in your understanding of finances could completely change your future life.