Old rules do not apply if you need to save for retirement. When giving advice about how much to save for retirement, financial experts used to advise people that they will need to withdraw 4% from their retirement portfolios for each year in retirement. Many said that retirees will need 70-80% of their pre-retirement income. Using these formulae, people would need $1 million for retirement if they planned to live until 90 years of age. It is because of these calculations that many reports on retirees' financial readiness are so bleak. However, many retirees report that they can comfortably live on $250,000 - only one quarter of what the experts say they will need. The old rules involved keeping retirees' pre-retirement life style, while flexible retirees adapt their lifestyles to accommodate less money by doing things like continuing to work part-time. Viewed in this manner, the RAND Center for the Study of Aging found that 71% of retirees will be OK when the time comes. So how much to save for retirement?
Factors that affect what will be needed for retirement
Many retirees actually save a considerable amount of money when they retire, and these projected savings need to be taken into account when planning how much to save for retirement. For example, retirees are no longer putting 10-15% of their earnings into retirement accounts. They are not paying payroll taxes. They do not have an expensive commute to work, and the kids are out of the house. Also, people are more conscious of the money they DO have when they retire, so they might spend less. In addition, many retirees will have paid down their debt to significantly smaller amounts.
Making the most of what you have and still retiring comfortably
When it comes to how much to save for retirement, many financial experts say it is more important to look at SPENDING as opposed to INCOME. Again, many retirees find that with spending modifications, they are able to comfortably retire on much less money than was previously thought. For example, many retirees move to smaller homes or homes in lower-cost areas. They may not take as many vacations as they envisioned. Again, they may continue to work part-time well into their retirement years. They may find that they do not have to spend as much on clothing, now that the need to update their wardrobes is gone.
The new advice about how much to save for retirement
Most experts today caution against the many available calculators of what will be needed at retirement. That's because retirement calculators are estimates only, and no one agrees on a "hard-and-fast" amount. According to experts, the most sophisticated calculators cannot also predict the future. There are just too many unknowns, such as the state of the economy and the health of markets. Instead, people are advised to envision the lifestyle they want to attain at retirement, when they plan to retire and how aggressively they save for retirement. Riskier investments may yield more money than ultra-conservative ones. Then, people should take a look at what they already have saved. People are advised to build a "safety cushion" into their retirement planning by saving more. People who insist on using calculators are being told today to redo the figuring every year or two, instead of seeing just one number to aim for. Also, whereas the "old advice" was to pay down debt as much as possible, people today are being advised to strike a workable balance between paying down debt and saving for retirement.
Some advice remains the same
The advice to save, save, save still holds true. Putting even an extra 1% into a 401K or retirement account can really add up. Yet, today people are being advised that it is important to be realistic when it comes to how much to save for retirement. People who commit to "reasonable but meaningful" savings are not setting themselves up for failure. Another time-tested rule is to budget carefully. Though much of the advice has changed about how much to save for retirement, it is still as important as ever for people to save. There simply is no substitute for a smart, reasonable and workable savings plan coupled with budgeting. These two tactics, along with easy lifestyle modifications, will ensure that people are well-prepared for retirement.