I read a new recommendation for determining how much of your retirement nest egg you can spend in retirement without running out of money before you run out of life. But before we cover the spending topic, let’s quickly summarize what you need to know about saving for retirement. (Also see my more detailed post here.)
Retirement has changed in many ways. Pensions are disappearing for new workers. Some people think Social Security will cover their retirement, while others think Social Security will be bankrupt before they retire. Most people know they need to save for their retirement nest egg, but saving is hard and too easy to postpone until the magic of compound interest has too little time to work its magic.
Saving for retirement is a big topic on its own, so let me just pass along these summary tips:
- Start with small savings amounts from the FIRST day of your FIRST full-time job.
- The later you start saving, the bigger percentage of income you will need to save and the less time you will have for savings to grow.
- Increase the amount whenever you get a raise with the goal of eventually reaching 10-15% of your gross income going to retirement savings, including any company match to your 401(k) account.
- Put your retirement savings on auto-pilot with automatic bi-weekly savings into 401(k)/403(b) plans if your company offers it, otherwise start an IRA at any of the big mutual fund companies.
- Invest most of your savings in stock mutual funds or EFTs while you are more than five years from retirement; then gradually shift a portion into safer bond funds as your approach retirement, up to 40-50 percent (or 120 minus your age.)
- If you don’t want to figure out how to divide your savings into which type of investment (large company, foreign, small cap, real estate, etc.), then keep investing simple by investing in “index” or “target date” funds that have low fees and simple investment strategies.
- Don’t worry about the ups and downs of the stock market and your retirement account because you won’t be withdrawing the money for a long time.
- Remember that down markets mean you are buying more shares for the same savings amount, which will supercharge your investment accounts when the markets inevitable go back up. (Review other investing posts.)
Retirement Nest Egg
If you follow these simple rules, you should have a nice retirement nest egg when you reach retirement. Also know that even Republicans are unlikely to let Social Security go bankrupt, but even so, it is unlikely to pay you enough to live on in retirement without retirement savings of your own. See how much Social Security benefits you are likely to get at the Social Security website.
How well you live in retirement depends upon how well you save for retirement. Reduce the chance that your future self will come back in a time machine and slap you around for gross mismanagement of your retirement nest egg.
Next time, I’ll cover how to make your retirement savings last in retirement.