How Much Should I Save for Retirement?

One of the burning questions pre-retirees in Libertyville, IL, and beyond ask is “how much should I save for retirement?” There’s no shortage of advice. People are sometimes told to save 10 times their income by their retirement age or even to aim for $1 million by the time they retire. Frankly, these figures are somewhat arbitrary and may not constitute a good individual guide. 

Why? Because they don’t take into account individual variables that determine whether retirement nest eggs are “enough.” The amount folks need in retirement ranges enormously, depending on their expenses, what they plan to do in retirement, their age, the age at which they retire, their life span, their health, the sources of retirement funding, their family responsibilities, and whether they plan to work in retirement. 


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Because all these factors – and more – play a role in your retirement savings, there’s no substitute for working with a CERTIFIED FINANCIAL PLANNER™ Professional in the Libertyville area to develop a comprehensive financial plan. CERTIFIED FINANCIAL PLANNER™ Professionals must have experience and training in all aspects of planning and will work to create a unique plan for you.

The wisdom of this can be seen if you contemplate the differences between individuals in planning for retirement. Your next-door neighbor may want to travel extensively, retire at 66, has no children, enjoys a paid-off mortgage, and has accumulated a $1 million+ nest egg for retirement. 

But someone down the street may want to run a business in retirement, is providing financial support to their grown children and grandchildren, recently bought a second home (with a mortgage), and has $200,000 saved for retirement. 

These two people need and want very different plans.


What a Comprehensive Financial Plan Does

A comprehensive financial plan covers many aspects of one’s financial life. Why? Because retirement planning doesn’t just equate to how much you have saved. It typically will cover all aspects of your financial life, both now and as you age.

This also may include your specific goals and priorities. You may want to pursue a hobby, travel, or spend time with your grandchildren. A comprehensive financial plan always has your individual goals as a starting point.

A comprehensive financial plan may include the following:

  • Cash management of your expenses versus your income
  • Retirement funds: amounts, contributions, withdrawals, asset allocation, and tax planning
  • Investment funds: amounts, contributions withdrawals, asset allocation, and tax planning
  • Risk management: insurance for your assets, health insurance, and life insurance if you have dependents
  • Education savings if you contribute financially to a child or grandchild’s education
  • Estate planning: wills and trusts for disposition of your assets to your heirs and powers of attorney for medical and financial affairs should you become ill or incapacitated 


Developing a Plan

A CERTIFIED FINANCIAL PLANNER™ Professional will review your expenses and income for several reasons. They will make sure you are living comfortably within your income. They may also make recommendations about retirement savings and other plans.

Pre-retirees and their advisors can use cash management for another important reason: forecasting their retirement budgets. You and your advisors can’t hope to determine whether “enough” is saved for retirement without a working idea of what your expenses will be.

It’s not uncommon to hear rules of thumb like “plan for 80 percent of your pre-retirement expenses in retirement.” But frankly, rules of thumb do not apply to everyone. A plan that assumes your retirement expenses will fall from pre-retirement levels may not reflect your situation.

These rules often assume that people have high commute-to-work costs which will vanish in retirement, for example. But what if you don’t have high commute costs, or want to continue to work? What if you want to travel extensively – so much so that your costs rise in retirement?

The best plan develops a working budget now. You and your CERTIFIED FINANCIAL PLANNER™ Professional can then forecast a reasonable retirement budget, using the current one as a model. If you are currently paying a monthly mortgage, for example, will payments continue when you retire? Are your expenditures on groceries and restaurant meals likely to rise, fall or stay the same?

A good cash management plan for retirement will typically take into account increases in the cost of living. Health care expenses, for example, have risen steeply over the past several decades. It may also take into account general inflation costs.

Once you know generally your expenses in retirement, you and your financial planner can begin to forecast your income. The goal is for you to have income that comfortably covers or exceeds your expenses, just as it is now.


Income in Retirement

Many financial planners begin by forecasting your Social Security benefits if you are eligible. Social Security benefits are not likely to cover all your expenses, of course. But they do provide a certain percentage of your income.

In addition, when you plan to retire affects the amount you have available. You are entitled to your full amount at your Full Retirement Age (FRA), which is determined by birth year. You can take Social Security at 62, but your benefits may be reduced by up to 30 percent – and the reduction is permanent.

Conversely, Social Security benefits can rise every year if you delay taking them between your FRA and the age of 70. These increases are also permanent. 

Once you have an estimate of your Social Security benefits in retirement and your expenses, your financial advisor can forecast what you’ll need in retirement funds such as 401(k)s and Individual Retirement Accounts (IRAs). 

They will also work with you on asset allocation strategies to ensure that your retirement funds last through retirement. They provide advice on required minimum distributions (RMDs) since withdrawals from these accounts are typically required at a specific age.

Your CERTIFIED FINANCIAL PLANNER™ Professional will also advise you on tax strategies both now and in retirement – which is necessary since 401(k)s, IRAs and RMDs feature important taxation issues. 

So the answer to “how much should I save for retirement” isn’t’ one size fits all! It’s the answer you and your CERTIFIED FINANCIAL PLANNER™ Professional develop together.

At Prism Planning Partners, we are CERTIFIED FINANCIAL PLANNER™️ Professionals committed to facilitating important questions so that we can help you explore all of your opportunities. We offer a broad array of financial planning and consulting services for our clients-including retirement, investment, and estate planning.

Contact us today and let us illuminate your possibilities!


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