How Much Money Do You Need To Retire?

I was lucky enough to meet Todd Tresidder, author of the book How Much Money Do I Need To Retire, a few years ago at a conference.

I’m really glad I did, because he introduced me to his book exactly at the time I needed it. It helped me figure out what to consider when figuring out how much money I needed to retire.

I’ve been saving at a decent pace for retirement, but I had no clue if I was saving enough or how to plan how much I really needed to save for retirement.

I had run some numbers based on the common retirement calculators you find around the internet, but I always felt they didn’t allow me to properly adjust the variables for the situations I wanted to test.

Even though I knew the retirement calculators I found on the web didn’t share the whole story, I was blown away by how much I was really missing when I read Todd’s book for the first time.

Todd is a retired hedge fund manager and really knows his stuff. He could have written the book based on his personal knowledge, but instead he took the time to quote some amazing research that really drove his points home.

So what concepts did Todd open my eyes to? Here are just a few things you’ll learn in Todd’s book.

Order of Investment Returns Matter

Every retirement calculator I’ve ever used has you input a number for what you expect your investment returns will be. Some make it a bit more complicated and have a pre and post retirement investment returns number.

The problem with these methodologies is, even though your investment returns may average out to that number over the long run, the order and timing of the returns matter much more.

This is especially true as you start drawing down on your retirement funds. If you have big losses as soon as you start withdrawing from your retirement portfolio, you may never recover.

Todd does a great job of explaining this in his book and you could be shocked by the how important this concept is.

Two Key Numbers That Will Completely Change Your Retirement Planning

If you haven’t ever read about these two key numbers, then you might be surprised at the significance of them. The first number is percentage of income saved vs percentage of income spent.

After a bit of thought, it makes sense that if you save more then you’ll spend less, assuming you don’t go into debt. However, this ratio is capable of determining how many years it will take you to be able to retire. Todd includes a chart in his book and the results could make you rethink your retirement planning.

The second number that will completely change your retirement planning is almost completely outside of your control. The second number is your return on investment minus the inflation rate.

This is the real growth of your retirement assets. Inflation is completely out of your control so you’ll need to monitor and adjust for it as you get closer to retirement.

As far as investment return goes, you can invest in riskier or safer assets to change the magnitude of your investment returns, but it is highly unlikely you can actually earn a set investment return each year.

These numbers, investment returns and inflation rates, have a huge effect on your retirement because of the effect of compounding. Todd does a great job of explaining this and its impact in his book.

These are just a couple of many things Todd will open your eyes to if you read his book, How Much Money Do I Need To Retire.

If you want to pick up a copy, you can order it on Amazon as an eBook or a physical book. If you do buy his book through the links in this post, I will receive a small commission as I am an affiliate of Amazon.com.

Have you started planning for your retirement yet? What challenges have you run into so far?

Are You Saving More For Retirement Yet?

Do you want to retire? If so, part of your retirement planning should likely include saving more for retirement. You'll be thankful you enacted this retirement idea today. Find out if you should be saving more for retirement on MoneyManifesto.com.People commonly state that they’re waiting until some unspecified point in the future to increase their retirement savings.

People say “I’ll increase my savings rate when I get my bonus, my next raise, when i turn 30 or next year when I have a bit more breathing room in my budget”.

Well, I’m here to tell you that next year is here and it is time to increase your retirement contributions.

Just to show you that I’m not talking the talk but actually walking the walk, I just increased my Roth 401(k) contributions by more than half of my recent pay raise.

All I had to do was log in to my 401(k) account and change my contribution percentage. It took a total of about three minutes and was so easy that I bet a kid could do it if you told them what you wanted done.

Why Increasing Your Retirement Contributions Is Important

Unless you are a retirement savings superstar, most people only contribute just a few small percent of their income to their retirement accounts. My employer’s default savings percent is only 3%, which is nowhere near enough to retire on.

Even when you consider your employer match, I’d only be saving 6% of my income for the future. Plug that into the calculator below and you’ll see that is nowhere near enough to retire on. However, at least these programs get people started with their retirement. Many people who don’t have access to auto enrolling 401(k)s don’t contribute at all!

Knowing that most people start at such small contribution percentages highlights the need for you to increase your retirement contributions. I personally think saving 15 to 20 percent of your income for retirement is a reasonable goal if you start investing when you are in your 20s. If you start later in life, you may need to save an even bigger percentage of your income.

A Cool Tool To Help You Visualize Your Retirement Savings

Figuring out how much is enough to save can be difficult. For that reason, I’ve included this cool tool below that will help you visualize how increasing your contributions will change your retirement nest egg. The tool is from Personal Capital, a pretty cool company that is helping people invest for retirement.

In fact, if you link over $100,000 in investable assets (including 401(k)s) to your Personal Capital account, they’ll set up a free call with one of their financial advisors to review your investments. Of course, they’ll try to get you to sign up for their advising service as well, but either way I think it is a great value just for signing up to use their software!

You can sign up with Personal Capital here after you check out the tool below.

Post continues below this tool…

Now that you’ve had some time to play around with the tool, you can see increasing your retirement contributions even just a little bit can have a huge impact on your retirement!

Go Do It Now!

So why are you still sitting there, pondering whether or not to increase your retirement contributions? Go do it now. Call your retirement account provider. Walk down to your HR department. Type your retirement account provider’s website into a web browser. However you change your retirement contribution amount, go get it done now. You’ll thank me when you retire.

You May Need More Than Four Million Dollars To Retire – No Joke!

Want to retire early? You might want to rethink your decision. How much money do you need to retire? I couldn't believe it initially, but you may need $4,000,000 or more to retire... seriously! Find out why on MoneyManifesto.com.For the purposes of this article, I’m assuming you only want to rely on income from your investments to fund your retirement. That means no social security, no pensions or no other outside income.

I’m sure you constantly see articles about retirement and how to save $1,000,000 by the time you retire.

They make it seem like $1,000,000 will be enough to live on for your whole retirement, no matter what age you are today.

The Reality – $1,000,000 Isn’t Enough

Unfortunately, the facts for many people are much different.

Unless you’re planning on retiring today and living on $40,000 a year or less, having just $1,000,000 in retirement savings won’t likely get you through retirement.

Whenever you see these articles, they always state if you start investing at age 25 you only need to invest something like $322 a month at an 8% return to get $1,000,000 by the time you retire at 65. However, you would need to invest $736 a month if you wait until 35, which is over twice as much.

These facts are true and they’re a great example of how important investing early is in relation to compounding returns. It really drives the point home that you need to start investing as young as possible to get the most out of your money.

The problem with these articles is they aren’t telling you to invest enough. They lure you to believe that $1,000,000 is all you need.

Inflation Will Wreck Your Retirement Plans

Sadly, it’s too late to take advantage of compounding when you find out you need more. Depending on how much income you’ll need, you could require anywhere from $2,000,000 to $7,000,000 or more when you retire. It is even harder to hit those marks when you’re already 20 years into your plan and behind when it comes to your current savings.

If you’re 25 today and want to live on $40,000 a year in today’s money, you’ll need a lot more than $1,000,000 when you retire. Why? Inflation.

If inflation averages 3.5% a year (a historical average), then you’ll actually need $3,959,250 to satisfy the 4% rule and live off of $158,370 a year (today’s equivalent of $40,000 a year). Shocking how much 3.5% inflation can change things, eh?

In order to reach the goal of $3,959,250, you’ll need to invest much more than the amount you’d need to get to the big round $1,000,000 number. In fact, if you start at 25, earn an 8% return and inflation is 3.5% (that’s a lot of assumptions), you’ll need to invest $1,274 a month in order to live off of that $40,000 in today’s dollars when you retire.

No Longer Young? It’s A Scary Future

Things get worse if you’re 25 today and you decide to wait until 35 to start investing. If that was the case, you would need to invest $2,913 a month to reach that same goal. If that isn’t a wakeup call, I don’t know what is. You never hear this side of things in the mainstream media.

Assumptions Cannot Be Relied On

The other thing you never hear the big news articles discussing is all of the assumptions they make. The two big assumptions, investment returns and inflation rates, can vary wildly in the future just as they have in the past.

In 1980 inflation was 13.58%! If that happened for a prolonged period of time, you’d have to adjust your plan quickly and invest a ton more to make sure you hit your goal of $40,000 of inflation adjusted income when you retire.

In the 2010, the S&P 500 10 year annualized returns were only 1.41%! Again, that is a huge departure from our 8% assumption. If that happened for a long period of time in the future, you’d have to make adjustments to your plan.

Get Started Today No Matter How Small Your Contributions Are

Planning for retirement income is no easy task. It is extremely important you get started early because the future isn’t certain. It is that uncertainty that you need to get ahead of.

If you haven’t started investing yet, start investing today. It doesn’t matter if you can’t hit your ideal monthly retirement savings goals today. Start with something and work your way up to get to that level. You’ll be amazed how much easier it is to work toward your goal when you actually start working on it.

What do you think about the media’s emphasis on the magical $1,000,000 number? Is it time we accept that we need more than $1,000,000 to retire?

Note: I do think Social Security will be around in some form when I eventually retire decades from now, but it won’t be anything like it is today. That’s why I don’t rely on it in my retirement planning, if it is there when I retire, it will be icing on the cake.

Image by: Ervins Strauhmanis Text added by: Lance Cothern

3 End of The Year Retirement Savings Check Up Questions

Want to reach financial freedom. Financial independence requires that you do some financial planning, first. Check out these 3 great questions to ask yourself about your retirement at the end of every year on MoneyManifesto.com. You may need to adjust your budget to save more for retirement, but you'll thank yourself later. (#3 is always a good idea)Saving for retirement is no easy task. We’re quickly approaching the end of another year of our lives and that brings us all one year closer to retiring.

That’s why now is a perfect time to check and make sure you’re on track for retirement.

Here are a few yearly check up questions than can help you reach your retirement goals.

Are You Where Your Retirement Plan Says You Should Be?

Everyone should have a retirement plan. If you don’t, the first step is getting one. If you are responsible and have a plan, where does it say you should be this year?

There are two answers to the question, you’re either where you should be or you aren’t. While the answer may seem simple, the most important factor is knowing why your answer is what it is.

If you aren’t on target, is it because you aren’t contributing enough money or was there a recent market downturn?

Depending on how many years away from retirement you are, the answer to this question may require urgent action or waiting out the current downturn.

The key is to know where you are in relation to your goals and why you are where you are. Once you know that, you can formulate a new action plan to get back on track or continue with your retirement savings success.

Are You Happy With Your Savings Rate?

Your retirement savings rate is my favorite predictor of retirement savings success. The more you save as a percentage of your income, the less income you’ll need in retirement if you keep your lifestyle the same. Unfortunately, savings rate definitely isn’t the only factor in retirement success.

Even if you’re on track with your retirement plan, it may be because you got lucky this year with a major increase in your investment returns. If that is the case, the recent returns may not be what you’ll receive in the future and your savings rate may actually be too low.

You may want to look into increasing your savings rate so that you’ll stay on target with your retirement plan even when markets don’t perform as well in the future. There is no guarantee we’ll have amazing returns like we have had the last few years.

Did You Increase Your Contributions With Your Raise?

This is my favorite way to increase my retirement savings rate. Every year when I get a raise, I put half of my raise toward retirement savings. That means if I get a 2% raise at work this year, I’ll increase my retirement contributions by 1% of my total salary.

Some workplace retirement plans allow you to sign up for an automatic increase program. If your workplace offers this option, then you’ll definitely want to consider signing up.

Whenever processes, such as increasing your retirement savings rate, are automated there is a much more likely chance that the action will happen. You might not even notice the money missing from your checking account!

Whether you’re close to retirement or it is 40 years away, make sure you ask yourself these retirement savings check up questions every year. You’ll be glad you did!

Do you have any other retirement check up questions you ask yourself? I’d love to learn about how you do your yearly retirement checkup.

Image by: Ken Teegardin Text added by: Lance Cothern

When Should I Start Saving For Retirement? Now!

TMT Post PictureHave you put off starting your retirement savings because you don’t understand things like IRAs, 401(k)s, tax implications and contribution limits?

Don’t be afraid. Although sometimes those things can get a little technical, there are tons of websites with easy-to-follow advice and solutions you can use.

However knowing when should I start saving for retirement is a little bit of a tricky of a question. Lots of people are waiting for a tap on the shoulder or a nudge to let them know when to begin.

Out of all the questions you’ll ever have about retirement, the answer to this one is about as simple as it gets – start now!

When to Start Saving

The reason you should start saving for retirement as early as possible is because you’re going to want to take full advantage of one of your greatest assets, “time”.

You’ve heard of compound interest, right? If you invest $10,000 at the age of 22 and have an average annualized growth of 8% annually, you could potentially have $273,666 saved up by the time you’re 65 without ever doing anything else.

On the other hand, if you wait until you’re 45 years old to make that same investment into that same account, you’ll only have $46,610 when you’re 65 years old.

Do you see how starting early can help your balance to grow significantly larger over time? It’s possible that if you start early enough you could have a very healthy retirement starting as early as age 55 and never have to worry about money ever again!

Don’t Forget to Pay Your High-Interest Debt First

Of course, there are a couple of exceptions to this rule.

First of all, if you have high interest debts, you should pay those off first before you start saving up. After all, the only way you can guarantee yourself to get a 15% rate of return on your investment is to pay off that credit card that charges 15% APR.

The second exception is lack of a “rainy day” or emergency fund. You should have some funds set aside to get by with three to six months worth of unemployment before you start putting your money into retirement accounts where it’s less accessible to you.

How to Save Money for Retirement

There are lots of good ways to achieve financial freedom: Budgeting, investing, earning money on the side, etc.

By far and large one of the best and simplest ways I can think to save your money for retirement: Automate it!

If your company offers a 401(k), have a portion of your money go directly out of your paycheck and into that account. That way you never even see the money or think twice about what else you could have spent it on.

If it’s an IRA you prefer, you can also set up automatic transfers from your checking account to your IRA for easy funding.

The best way to allocate your money is like this:

  1. If your company offers one, invest into a 401(k), up to the matching program limits. (This will depend on the company you work for.)
  2. Put the maximum into your IRA, which is $5,500 (if you’re over 50, it’s $6,500)
  3. Put the maximum into your 401(k), which is $18,000 (if you’re over 50, it’s $24,000) in 2015.

Roth Versus Traditional Retirement Plans

Now, it’s time to look at the different types of retirement accounts: Roth and traditional. Though there are several differences between the two, the most important is the difference in the way taxes are handled between the two.

Roth accounts are funded with income after taxes are taken out. This means that there are no upfront tax benefits, but you will not have to pay taxes when you withdraw it.

On the other hand, traditional retirement accounts are funded with income before taxes are taken out. This means that when you get ready to withdraw it, you will be required to pay the taxes on that income.

How can you decide which of these options is best for you? If you’re just entering the working world, a Roth account may be better suited for you since you’re likely in a lower tax bracket. However, if you’re in a higher tax bracket and anticipate living on less income during retirement, then a traditional account may work out better for you.

Though this seems complicated and you may not want to deal with it, it will be worth it in the long run. You will be able to ensure that your golden years really are golden. Even if you make some mistakes along the way, that’s OK.

The important thing in knowing when to start saving for retirement is to start right away. Regardless of whatever mistakes you may be afraid to make, the longer you wait the steeper the hill you’ll have to climb later in life.

This post was written by my friend DW from The Money Template, a personal finance blog that talks about all things money related.

Images courtesy of FreeDigitalPhotos.net