Will You Have Enough Money to Retire?
I’m not a fan of the word “retirement,” because it has an old paradigm attached to it that doesn’t apply today the way it did for prior generations. People worked until they turned 62 or 65 and then retired, in many cases with a pension.
Today, there’s a movement toward pursuing financial freedom now, rather than waiting until your 60s, 70s or beyond. Financial freedom means you no longer have to work to pay your monthly expenses, but rather, you’ve saved enough or have assets that will generate enough income for you.
At the same time, an increasing number of people are working at creating a fulfilling life now, not waiting until retirement to do what they love. And that includes doing work they love, so they don’t want to stop working at ‘retirement.’ (Check out this very inspiring lady who is a nurse at 91).
But for many people, this seems totally out of reach.
Americans of all ages are worried about retirement, a recent study showed. Boomers expect to live on less than they’d planned. Eighty-three percent of Gen X-ers think they’ll have a harder time trying to achieve financial security than their parents, and only 18% of Millennials are very confident about being set for retirement.
And many who worry about retirement feel like it’s too overwhelming and complicated to think about (I’m repeating what I hear from people a lot). Maybe you feel stretched financially, time-wise and energy-wise. Maybe you feel like it’s all you can do to respond to what’s in front of you at the moment.
But speaking from experience, it’s much less stressful to get your ducks in a row when it comes to financial freedom than to just not know. Don’t just keep saving and guessing. It’s important to know how much you’ll need and start working toward it.
To create that life you want now, you may need to simplify or scale down (by a little or a lot) to make your money stretch and open up your options. And while the idea of scaling down might make some people cringe, it can be healthy for you. In fact research suggests that simplicity correlates with well-being.
So whether financial freedom or doing work you love is on your radar, or if you want to be set for a traditional retirement, how do you get to that point? How much do you need?
Unfortunately, it’s not possible to come up with any perfect number, because there are so many variables (for example, how much are you willing to simplify? And you can only guess at future needs, or how many years you need to cover, or market fluctuations, interest rates, inflation).
But you can get a ballpark figure to work toward.
First, you’ll need to have an idea of what percentage of your income you’ll need once you stop working. A general rule of thumb is that for retirement, or financial freedom, you will need 78% of your pre-retirement spending put away for every year for the rest of your life. That figure can go up or down depending on your lifestyle and other variables.
Here’s a basic calculator from Bankrate to get a general idea of how much you may need:
If you run the numbers and it seems like an exorbitant amount, don’t get discouraged. It’s much more important to know what you need and start working toward it than to sweep it under the rug.
Keep in mind, this isn’t going to be perfect. It’s best to have a financial planner work all of this out for you (and I believe everyone should have a financial planner the same way you have a doctor). But if you’re a do-it-yourselfer, this will help you get started.
Work on what you can control. Focus on saving, and spending mindfully. Try to put something away from every paycheck. Then in six months, try to ramp up that amount. Give yourself a savings raise every six months. And compound it by socking away the money from every raise you get.
One caveat: Your biology can work against you here because your brain sees saving as a loss (a loss of spending money). But see it for what it is: A gift to yourself, and that gift is financial security.
You may be able to save much more than you ever thought possible simply by making it a priority, having a plan for the long term, making saving something you do with each and every paycheck (so it’s consistent) and being super-purposeful about your spending. We waste a lot of money when we don’t have a plan for it. In fact, I read that we only use about 20% of what we buy. That’s from both impulse spending and thinking we need things we later find we don’t. So you may be able to save much more than you think.
One thing to focus on is trying to raise your net worth.
Start by figuring out your net worth (what you have left after you subtract your debts from your savings and assets). Track it monthly to make sure it’s always growing (and this alerts you to changes you need to make if it’s not).
Then save aggressively and spend mindfully. In fact, I’ve found tracking spending can take your efforts and results to another level because recording it makes you more aware. (I use a great app called Spend Tracker).
At the same time, you want to enjoy your money and your life everyday. The trick is to do it very purposefully. Have a spending budget. Spend on things that help you grow personally or professionally and make your heart and soul sing instead of just spending.
If you know you can spend $1500 a month over your basic needs, track it weekly (this is my favorite spend-tracking app) and make sure you don’t go over. Keep your long term goals of financial freedom in mind. Again, see it as a gift to yourself.
If you feel really behind, consider hiring a money coach or Certified Financial Planner® to help you find and close gaps in your plan so you can save more. It’s that important.
But simply starting the process and knowing you’re getting the long-term covered will help you sleep better at night.
What can you do to increase your cash flow and start saving more? We’d love to hear about it in the comments below (and your comments and questions help others, too).
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