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How Much Do I Need to Retire?

During his time in the Oval Office, President Dwight Eisenhower kept a tight grip on his time. He asked his staff to separate requests that reached his desk in two categories—important matters and urgent matters. When asked about his strategy, Eisenhower said, “What is important is seldom urgent, and what is urgent is seldom important.”

In most instances, this strategy (sometimes called the Eisenhower Decision Matrix) is quite useful for managing daily activities—such as meeting a team deadline at work (which might be urgent, but not necessarily important for your career) or responding to an email right away (which could be classified as neither important nor urgent).

So, what about preparing for retirement? Is it an important—or urgent—topic at this time? You may be asking, “How much do I need to retire, anyway?”

A quick glance at the Employee Benefits Research Institute’s (EBRI) 2020 Retirement Confidence Survey indicates that American workers have both a vital—and pressing—need to prepare better for retirement. Nearly 7-in-10 American workers have less than $250,000 set aside for retirement. And 60% of American workers have not crunched the numbers on how much they’ll need to live on in retirement.

Lack of Understanding Around Retirement Spending and Income

While many workplace retirement plans provide employees with tools that can help them calculate how much they will need to save for retirement, there remains a disconnect on how to effectively use these tools. More than half of American workers say they are not sure how to calculate their retirement spending needs.

To help answer how much you need to retire and demystify this important—and urgent—topic, here are a few practical tips to consider:

  • Think carefully about what—better still, who—the money is for in retirement. What do you want to do with your time in retirement? Where would you like to live? What are some places you would like to visit? With whom do you want to spend your time in retirement? To what extent do you want to support loved ones or charitable causes? Clarity on these types of questions can help shape many of your spending priorities for retirement, as well as important savings goals for now.
  • While spending needs in retirement can vary based on personal expenses, a reasonable goal is to save enough to replace 60% to 80% of your preretirement work pay. To start the replacement conversation, add your projected, annual Social Security benefit (it’s common for Social Security to replace about 40% of preretirement income) and pension amounts together. How closely do these benefits replace 70% of your current pay? If there is a shortfall, multiply this amount times 25 to arrive at a ballpark savings goal for retirement. But what if you are still in the early phase of your career, and you simply want to get started on the right track? Many advisors suggest setting incremental goals of saving 1 times your current salary by age 30 and 3 times your salary by age 40. The retirement savings goal includes your personal contributions to your workplace retirement plan, any employer contributions to your plan, plus any investment earnings you may receive over time.
  • What happens if your retirement date arrives sooner than you anticipated? Many retirees leave the workforce sooner than expected. This places a premium on making the most of your time each day (like President Eisenhower), and evaluating whether your current savings and spending habits support your long-range retirement goals. Consider evaluating what saving and spending habits are truly urgent.
  • Keep your eyes peeled for the potential blind spots that could undermine your plan—such as longevity in retirement and medical expenses as you age. The Social Security Administration estimates that for men and women who are age 65 today, their average life expectancies are close to 84 and 87, respectively. For married couples at age 65, there’s at least a 50% chance that one spouse will live past age 90. Fidelity estimates that couples who retire at age 65 will have about $295,000 in out-of-pocket medical expenses during retirement, excluding long-term-care expenditures.

Don’t be disheartened if you are not on track for retirement at this time. There are ways to improve your financial circumstances. To learn more about how much you will need to retire, and to prepare well for retirement, reach out to a CFP® professional in your area today.

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