It used to be relatively simple to plan for retirement: You’d just circle the date on the calendar when your pension was set to kick in and have your co-workers start planning your send-off party.
But that was then. These days, retirement planning is a lot more complex. The number of corporate pension plans has fallen dramatically over the past two decades – from about 92,000 single-employer defined benefit plans in 1990 to 29,000 in 2009, according to the U.S. Government Accountability Office. With the burden of paying for retirement shifting to individuals, personal savings and investments are becoming the primary source of retirement income.
In the old days, Grandpa knew how much his pension would pay him for the rest of his life. Now the big question is: How much income will your savings generate from month to month during your retirement?
So what can individuals do to better prepare for today’s retirement landscape? The answer is to plan ahead. Start building a stronger foundation for your retirement with two important steps:
• Step up your savings. How much should I save? This is a common question among those planning for retirement. The rule of thumb is to save at least 10 percent of your salary each year, but that’s if you started saving early in your career. If you’re 40 or 50 and haven’t started socking away money in your 401(k) or IRA, you may find that a 10 percent savings rate won’t be enough to help you reach your retirement goals.
Your first step should be to meet with your financial adviser to assess your current nest egg and savings rate and estimate how much annual income you’re likely to need during retirement. An adviser can help you stress-test various retirement scenarios and identify areas of your plan that need adjusting.
For instance, you may find that boosting your savings rate by a few percentage points a year will get you closer to your long-term financial goals. The more you save, the better off you’ll be. And even a small step-up in savings can make a big difference.
• Rethink your retirement budget. For many years, experts recommended aiming to replace roughly 80 percent of your annual preretirement income during retirement. The idea was that living expenses typically decreased in retirement. But that advice assumed that you were going to spend your retirement in a rocking chair on the front porch. These days, retirees are likely to be very active. And that means higher costs to keep up with a more expensive lifestyle.
It’s important to look at your planned retirement budget realistically. Work with your financial adviser to map out essential costs, such as housing and food, and discretionary expenses, such as travel and entertainment. That exercise can help you set credible long-term savings goals based on your expected income needs during retirement.
Revising your plan
Evaluating your retirement savings goals is essential whether retirement is imminent or 30 years away. By considering your savings goals and income needs, you may find that your current plan is likely to leave you short when it comes time to stop working. The good news is that you have options, such as working a bit longer than you initially planned. The fact is, delaying retirement by working just a few extra years can keep you from having to dip into your savings, meaning more of your money can continue to benefit from the tax-favored compounding in plans such as 401(k)s and IRAs.
You may also find additional funds – in the form of an inheritance or the proceeds from the sale of a family business – to help you move closer to your financial goals.
Your financial adviser can help you review and adjust your current retirement savings plan to factor in such windfalls. Develop a plan and stress-test it with your adviser. The results can help you understand what’s possible, and also what may be out of reach.
• Timothy J. O’Connor is first vice president, investment officer and certified financial planner with Wells Fargo Advisors, 2424 Lake Shore Drive, Woodstock. Email timothy .firstname.lastname@example.org.