'How much will I need to retire?' Helping employees work their 401(k)s
There are five key questions every employee needs to consider on their path to retirement readiness, and employers are the ones who need to deliver the message as part of a much-needed financial wellness program.
Everyone wants to live comfortable in their retirement. They often do not know how much they will need. It becomes scary when they wonder if they will run out of money. How can you help your employees better understand planning for their retirement?
Here are five questions pre-retirees and every other employee should be considering. Discussions or presentations on these topics might be delivered through on demand videos, online training, webcasts or podcasts, as well as direct messaging to participants.
Q: How much money will I need to have coming in when I am no longer working?
A: 80% of your preretirement income. The advice website, the Motley Fool indicates that generally speaking a financial planning guideline is people should expecting to need 80% of their pre-retirement income when they stop working. This is going to vary. The money management firm T. Rowe Price estimates the range as between 54% – 87%. They also feel most retirees come below 70%. Why the variance? Retirees often have paid off their mortgage before they leave the workforce. You will have stopped saving for retirement when you stop earning. These factors bring the percentage down. The factors bringing the percentage higher include those plans to “travel the world” once they leave the world of work.
Q: How much should I have saved before I retire?
A: 10 times your salary. This number is often expressed as a multiple of your annual salary. You might use an average across several years to arrive at this number because some people squeeze in as much overtime as possible in their last couple of years. Fidelity Investments recommends having saved eight times your annual salary by age 60 and 10 times by the time you have retired. They provide other mileposts along the way. By age 30 you should have one year’s worth of annual salary in retirement savings. By 40 it should be 3X and 6X by age 50. Bear in mind this isn’t only contributions because your firm should be contributing matching funds and your investments should be growing in a tax deferred environment. This can also be expressed as a percentage of your annual salary. 10%-15% has been a recommended amount.
Q: What is a safer, conservative level of withdrawals?
A: 4%. No one wants to run out of money. The good news is your retirement assets are not your only source of income. You should also be collecting Social Security. You may also have a defined benefit pension plan or an annuity that can be adding income. These sources are considered regular or guaranteed sources of income that are beyond your control. They usually are not enough to hit your income goal. This raises the question, how much should you dip into your retirement savings each year? The number most financial planners talk about is 4%. The money management firm BlackRock expressed this as 4% in the first year with a small 2% boost in future years to take inflation into consideration. This means $10,000 withdrawn the first year might be followed by $10,200 in the second year.
Q: How long will my money need to last?
A: Until about age 83. The human body is hardwired to survive. It will fight to stay alive. No one wants to die before their time. Now, life expectancies enter the picture. This varies by culture and current age. According to the Centers for Disease Control and Prevention’s 2021 figures, the overall life expectancy for a 65-year-old American is 18.3 years or age 83. Men come in at 81.9 and women at 84.6. Many other factors enter the equation. Do you live in a big city or in a rural environment? Do you smoke? Does your family have good genes?
Q: What can I do if I have not saved enough for retirement?
A: You can “catch up” or redirect other financial assets to produce income. It is never too early to start saving for retirement. If you have left this goal until later in life, you have some options. You can save more, using catch up contributions. If you are 50+ you can add an additional $7,500 to your 401(k). You can consider transforming a whole life insurance policy with a substantial accumulated cash value into an annuity using a 1035 exchange. You can use outside financial assets to generate income for retirement. You can consider downsizing your home or moving to an area with a lower cost of living.
Related: Is $1 million really enough to retire? Even the wealthy say, ‘Do the math’
Everyone intends to stop working someday. The earlier you start planning, the better prepared you will be.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon.