The big question hanging over the heads of most everyone over 40 is: “Will I ever retire?”
An alarming number of people seem set on the notion that retirement will be optional, as if the work they’ve done for years always will be available to them (downsizing won’t happen), their health will remain perfect forever and their own interest in working for income will never flag.
Yet we don’t know how any one of these factors will play out in our lives, thus the stress we feel when wondering about how to stay on track for retirement.
So, let’s make the math simple and find a way to start to settle the big question. First, take into consideration Social Security. When you quit work after 35 years, assuming you paid taxes and put into the program, the likely outcome is something like the current average annual payment of $15,528. (You can find out your actual, personal estimate at the Social Security Administration online.)
It might be more or less. The calculation is complex and changes according to your age now and at what age you start collecting (waiting means you get more), but let’s start there. If you are married and your spouse worked as well, double it to a round $30,000.
Not a huge windfall, but not zero and remember, it will be for life and will adjust for inflation. Your job as a retirement saver, then, is to estimate your real cost of living and find a way to plug the gap.
Do you expect to travel luxuriously? Own two homes? Splurge on your children? Well, that’s quite a gap. Instead, think about your actual cost of living, including the cost of healthcare in retirement. Is it much more than your cost of living today?
The answer there is, probably not. If you are properly insured, pay off your mortgages and debts, avoid buying a pricey sports car at 60 and otherwise behave yourself, chances are your cost of living in retirement will look a lot like your cost of living now, and maybe be a bit less.
If you have that two-income Social Security flow but no pension, then the math gets very easy. Say you know you have a cost of living of about $50,000 a year. That means you need investments that generate $20,000 a year in retirement income.
Simply put, that’s $500,000. If you are 40 today and expect to retire at 25, you need to put away just $7,500 a year and earn a market return of 7.2% to get over the “half-million hump” on time. That’s about $144 a week.
Do you spend about that much eating out? Probably. If you start off in your 401(k) just hitting that basic number every week, your taxes will drop (you will earn less for tax purposes, both state and federal), your company is likely to match it (free money!) and you’ll feel better about your retirement prospects immediately.
Being on track is a huge mental boost, and it pays dividends down the line. The larger a retirement balance you see, the better you feel and the more likely you are to make good short-term choices with your money. It’s a virtuous circle that anybody can put into practice at almost any age.