When it comes to planning for retirement, the vast majority of investors focus on the size of their nest egg as the ultimate goal. Whenever I am asked during an initial meeting with a potential new client how much money they will need to save for retirement, my answer is always the same, “That depends. How much income will you need in retirement”?
Their typical response is, “I don’t know. I never really thought about it.”
Contrary to what many investors may think, in order to know how much money you need to save for retirement, you must first determine how much annual income you will need in retirement.
Planning for retirement is the process of determining how much income you will need during your retirement years to support the lifestyle you will want, and positioning your assets to provide that income. Without knowing how much annual income you will need in retirement, you cannot determine:
How much money you will need to save.
What rate of return you will need on your investments.
How much risk you need to take.
How to properly allocate your investments.
If you have not determined how much income you will need in retirement, you’re not alone. According to a recent Retirement Confidence survey conducted by the Employee Benefit Research Institute, more than half (57%) of individuals over the age of 45 said they have never tried to determine how much income they will need in retirement.
Everyone’s idea of the perfect retirement is different. But one thing we all share is a desire to have the money we will need to do whatever it is we want to do when we stop working. How much you need to save for retirement is unique to your situation. The amount of money you will need to save for retirement will depend on the amount of annual income you will need to live your desired lifestyle in retirement.
When retirement is 10 or 15 years away, it may be difficult to even consider what your future savings and annual income needs will be. There are, however, planning strategies and techniques that can allow you to find the answers to these questions.