THE 1st AND MOST IMPORTANT RULE-
Start saving! If you are already saving...great job! Now let’s make sure you are saving the proper amount. To get to a million dollar retirement portfolio it’s not as hard to get to as you might think. Understand there will be ups and downs however staying the course during those down turns will pay-off over the long-term. ‘Slow and steady wins the race’. While starting to save early is always advised, it’s not always possible with prior student debt, lay-offs, children, emergencies, etc. So I made the assumption that a couple didn’t start saving until they were 40 years old, quite a bit older than many financial articles write about – albeit probably more realistic. So let’s get started...
We need to make some assumptions, of course your numbers might be slightly different, but this will give you an idea of the process to figure out what you need to do.
With the above assumptions, a couple who starts saving at age 40 saves 10% of their income for 25 years which earns an average return of 7% will reach their goal of a $1 Million retirement portfolio. I call this the 25/10/7 plan. Save for 25 years, 10% of your income, portfolio earns 7% per year.
SOME POINTS TO REMEMBER-
Click below for a 1-page PDF of this article which includes a graph which shows how much you need to save on a monthly basis depending on when you start saving.
A New York Times article discussed that a $1 million retirement nest egg isn’t what it used to be. While this is more than 90% of U.S. retirees have amassed, $1 million doesn’t go as far as you might think. That said I wanted to take a look at what it takes to provide a $100,000 income annually during retirement.
The 4% rule-
The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years. This very useful 'rule of thumb' that was developed many decades ago, although like any rule of thumb it is just that, an estimating tool. While it is a useful estimate, do not depend on this rule alone, build a comprehensive financial plan for your retirement.
Using the 4% rule as a quick 'back of the napkin' estimating tool allows us to see how someone with a $1 million in their 401(k) and any other retirement accounts might help get them to their hypothetical goal of $100,000 (before any taxes) per year. Note this is not to say that everyone needs a $100,000 or any particular amount during their retirement, but rather this example is simply meant to illustrate the math involved.
Doing the math-
The $1 million in the 401(k)s and IRAs will yield $40,000 per year (using the 4% rule). This leaves a shortfall of $60,000 per year. A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year. The shortfall is now down to $20,000
So how can you make up this potential shortfall-
Things to beware of in trying to boost your nest egg-