How much money do you need to retire? Do you know what your monthly budget would be if you retired tomorrow? Better yet, do you have a current monthly budget?
Figuring out the answers to these questions is important, especially as you get closer to your retirement years.
If you’re unsure where to start, Jason Erickson, owner of Alternative Strategies Group, Inc., in Sioux Falls, South Dakota, offers advice as you plan for your future.
Start with a budget
“A lot of people don’t know what their budget is, so my advice is to get a handle on it now. If you don’t know really what it’s going to take on a monthly basis to retire comfortably because you have no idea what you’re spending now, it will be hard to guess what you’re going to spend when you’re 60 or 65.
“Let’s say a person is used to living on $5,000 a month in Sioux Falls, South Dakota. What I would normally do is take the $60,000 needed for the year and divide it by 5%. With that, you'd need about $1,000,002, but you don't always live just on your 401(k) balance. A more robust financial plan would also account for Social Security, a pension and any money you might inherit. There are a lot of different sources of income besides your investment portfolio.
“A retirement savings goal is good to stick on the fridge and shoot for, but oftentimes when I start with that, people say, ‘I'll never save a million dollars.’ But, they probably don't need all of that just from their retirement plan. They probably have other sources that will help them get there,” says Jason.
Be cautious with calculators
“Fidelity, Vanguard and Charles Schwab are some of the biggest vendors in the business that typically have a calculator, and especially for 401(k)s that use those vendors.
“A lot of times those calculators will say you’re way behind or you’re perfectly fine and ready to retire. But you have to kind of squint at the numbers and decide if the inputs are right and make sense.
“I would caution anybody from putting a lot of, pun intended, ‘stock’ in a calculator. I would talk it through with your spouse and maybe an accountant or a financial advisor to say, ‘Hey, this is the number I came up with. What am I missing?’ Just a second set of eyes is good,” Jason says.
Be realistic about future finances
“Our industry generally says not to take more than 5% off your nest egg every year. So, pretend that you had a million dollars in your 401(k) in that example. If you don’t take more than $50,000 a year out, we can probably invest it and make it continue to grow for as long as you live in retirement and not eat into the principal.
“The financial planning community has always advised that at least five years before you’re ready to retire, you should start lessening the risk in your portfolio. And that might mean less stock-type investments and more bond-type investments. They’re typically safer and more conservative. However, after 30 years of doing this, I tend to not like to put black-and-white timelines on that because really what matters to me is how much you plan to use out of your saved retirement dollars.
“Are you really going to start depending on this money to live on in five years, or do you mean you’re just going to quit your job in five years and you’re going to go back to farming or you’re going to work a part-time job at Ace Hardware or you have a pension so you don't really need this money? But generally, five years or less from using the money, we'll start to make allocation adjustments to make it a little safer.
“Social Security is always in the news that it’s ‘bankrupt.’ More than half of my clients laugh at me when we include it in our planning and say it's not even going to be there when they retire. But it will be because the federal government is taking our money out of our paycheck every two weeks,” says Jason.
Plan for your lifestyle
“If you're spending $10,000 a month right now with two kids in tae kwon do and softball and taking Disney World vacations and you're not going to spend that much once they’re grown up and out of the house, then we can kind of back off to $8,500 a month.
“It’s really knowing where your money is going now. If we have that kind of nailed down, most people don't change their lifestyle a lot when they retire. They don't buy an island or move to France.
“What I see happening more often than anything as it pertains to money in retirement, is maybe a couple takes that big trip that they’ve been thinking about or putting off their entire working life, like an Alaskan cruise or a trip to Australia. In the grand scheme of things, those are one-and-done $10,000 items. They’re not every year.
“So, if a client gets a good handle on their current lifestyle, we can shoot at a pretty good goal to save toward,” Jason says.
Think about timing
“The first thing that people want to watch for and consider is the magic age of 59½.
“Let’s just pretend it’s you and me in the workforce. If we have a 401(k) or a Roth IRA or a regular IRA, we really can't take money out of those accounts until we’re 59½. If we take it out early, they’ll penalize us 10% right off the top. And then probably charge us taxes besides.
“If you were depending on Social Security for part of your retirement income, you can start that as early as 62. A lot of people wait because if they’re still working in their early 60s and start receiving Social Security, they’re kind of penalized. Everybody who was born in 1960 or after has to wait until age 67 for their full benefit from Social Security.
“As a client is approaching age 62, we look at whether they’re going part-time. Is their spouse already retired because they’re older than them? Did they have a business and they’re ready to sell it and just collect dividends and maybe start their Social Security early? I would say 80% or more of the people I work with wait until they’re closer to age 67 so that they don't lose some of their Social Security,” says Jason.
Is early retirement an option?
“If you’re paying everything off and paying the house off early, and it only costs you $4,000 a month to live in Sioux Falls, South Dakota, and buy groceries and pay your taxes, and you both have a couple thousand dollars a month of Social Security coming in, you could certainly pull the trigger.
“I don't think that the answer to the question of retiring early is only if you inherit money or win the lottery.
“Even sticking $50 or $100 a month away in your 20s goes such a long way toward a big pot of gold at the end of the rainbow, so to speak. It’s like a crockpot. The longer it simmers, the better it’s going to turn out.
“The outlier right now is figuring out what type of health insurance you can get if you retire early. In Sioux Falls, we’re seeing anywhere from $1,200 to $1,800 a month for health insurance coverage.
“I use Medi-Share, a Christian share ministry for health coverage. And it’s not really insurance. It’s a medical sharing plan, but I only pay about $400 a month for me and my child on the plan. The big thing is it has an $11,000 deductible. So, that begs the question, ‘Do you have an emergency fund? Do you have the money set aside if you needed to pay that big, huge deductible?’” Jason says.
Jason says it’s most important to focus on having a proper budget or goal and starting to save money as early as possible, even if you don’t think you can afford to.
