A recent retirement study got me thinking about the parallels between retirement planning and dieting. BlackRock's 2013 Retirement Survey revealed that apathy about retirement planning is tied to a lack of understanding of retirement needs. According to the findings, “Confusion and lack of clarity around retirement needs has led many participants to inaction ... 45 percent say they are not saving [for retirement] because they don’t know how much they will need.”
Like healthy dieting, lots of people know they should be planning for retirement, but can’t get started. What this tells me is that people need to have an endgame in mind, and that helps provide the motivation to begin. The key is to use the retirement planning (or dieting) method that works best for you – whether it’s the simplest formula or one that’s more advanced.
For example, you could use an uncomplicated method for calculating your weight loss goal, such as losing five pounds each month for five months, for a total weight loss of 25 pounds by midsummer. Or, you could use a more complex calculation that takes into consideration your age, metabolic rate, current and desired body mass index and health issues or limitations.
Likewise, there are several ways you can determine your retirement savings goal, which is the first step in successful retirement planning. Finding the formula that makes sense for you is what’s important. Here are some options:
1. Multiply your current income by 20 (level of difficulty: easy).
Current income x 20 = your retirement savings goal
Like someone who wants to eat healthier would reference the food pyramid in planning a meal, this calculation gives you a broad idea of what you need to be saving for your nest egg. It assumes you’ll spend approximately 20 years in retirement, so use a larger multiplier if you have a longer life expectancy. If you’re young and unsettled in your career, estimate your future income at age 35 or 40 based on your current career trajectory and market value.
2. Use your replacement ratio (level of difficulty: moderate). Your replacement ratio is the percentage of your current income you’ll need during retirement. Like a dieter turning to Weight Watchers for a more accurate way of tracking food intake, this method gives you a more precise number than the previous calculation.
|Simple lifestyle versus current; little-to-no-travel; inexpensive hobbies||80%|
|Moderate lifestyle versus current; upgrades to home and car expected; some travel and hobbies planned, but nothing lavish||90%|
|Maintain your current lifestyle||100%|
|Improved lifestyle versus current; increased travel and hobbies||110%|
If you expect to have remaining debt upon entering retirement, add 5 percent to 10 percent to your replacement ratio depending on the amounts you still owe.
Once you know your replacement ratio, use this calculation:
(current income x replacement ratio) x 20 = your retirement savings goal
For example, if you currently earn $100,000 annually and determined your replacement ratio to be 90 percent:
($100,000 x 0.90) x 20 = $1,800,000
Again, this assumes you’ll spend 20 years in retirement, so adjust accordingly if necessary.
3. Get into the nitty-gritty of retirement budgeting (level of difficulty: advanced). Health enthusiasts looking to get serious about making permanent lifestyle changes might start tracking their intake of macronutrients and calculating calories burned based on their basal metabolic rate. Retirement savers desiring a more exact savings goal might use an advanced method like this to calculate their number.
To get started, track your current spending levels for the past two or three months, placing every expense into a category, and then estimate how those categories might change once in retirement. For example, your mortgage may be paid off, or your transportation costs might decrease because you’re no longer commuting to work – but your utility bills may be higher because you’ll be home more often.
Once you have an estimated monthly budget, the calculation looks like this:
(monthly retirement budget x 12) x 20 = your retirement savings goal
This calculation uses a budget based on your current costs, so you’ll also need to account for inflation to ensure your nest egg has the same purchasing power in retirement as it would today. This is where it gets complicated, so I’d suggest consulting with an investment advisor who can dig into the dirty details and do the heavy lifting for you – much like a dietician would delve into the meat-and-potatoes (pun intended) for someone requiring expert guidance with their diet.
Regardless of whether you’re looking to drop a few pounds, or finally make a plan for your financial future, what’s important is finding a method that works for you. The best part about retirement planning is that it’s an ongoing process, so if your first shot at it doesn’t seem to be the best option, you can take another stab. Remember to revisit your plan regularly to make sure it’s still working and to make adjustments as needed – especially if you want to avoid the dreaded “plateau.”