21 Jan How Much Do You Need to Retire?

Determining how much money you need to save each month— and where to put those savings to maximize returns—can be confusing. Here’s a guide to help clarify one of the most complex decisions you’ll ever make.

When it comes to retirement planning, Tammy Bynum-Mincey, a senior manager in customer care at Comcast, admits that she’s late to the party. “I’m 53 years old, I’ll be 54 in August,” says Bynum-Mincey, a newlywed splitting her time between
Atlanta and New Jersey, who’s gotten more serious about growing her nest egg in recent years. “One thing I have taken advantage of is maximizing the company 401(k), where our contributions are matched dollar for dollar up to 6 percent, so that’s what I am contributing.”

She is also participating in the employee stock purchase plan, which allows employees to buy company stock at a 15 percent discount. “It’s great because I have seen my savings climb because of those options from my employer,” she says. Like many parents, the hardworking senior manager focused on taking care of her family, which included helping to finance her daughter’s college education and placing retirement planning on the back burner.

For careerists ascending the corporate ladder and saving for the future, now is a good time to determine how much you need to save for retirement—and to gather the advice of financial experts. Those experts, like Taylor Herzog, a CFA, CAIA with TYME Advisors, a boutique wealth advisory firm in Dallas, Texas, recommend saving 20 percent of your pre-tax income each year, including any employer match from a 401(k). The remaining 80 percent should be allocated to balance your financial goals with your means.

Keep in mind, personal savings goals vary greatly depending on your retirement date, your desired retirement lifestyle, when you began saving, and how much you already have. Herzog advises women to “examine how much you have been spending thus far, then for each category, think through how that might change in retirement.” Some items, such as commuting costs, may cease to exist, and expenses like paying off a mortgage may expire over time.

No matter how much you’ve saved or how many years remain before you hang up your work heels, there’s no magic number when it comes to retirement savings. It’s an individual choice dependent on age, income, health, family history, and other circumstances beyond your control, like income loss due to downsizing. To help determine how much you need to retire, Diversity Woman spoke to financial experts to get their take.

Review spending habits

When preparing for retirement, it’s essential to have a firm idea of your spending needs. “Seeing exactly where every dollar is going will give you an indication of which expenses are likely to continue after you retire,” says Anna Barker, a personal finance expert and the founder of LogicalDollar, a site dedicated to helping people take control over their finances. “This will give you a ballpark figure of how much you’ll spend—though you should add some wiggle room for all those great post-retirement activities you intend to do.” Once you identify spending patterns, you can decide which areas to rein in to achieve long-term goals. A spender by nature with a penchant for high-end shoes in her younger days, Bynum-Mincey has since reined in her consumption habits. One thing she never did was carry a lot of debt. “I come from a family where it was impressed upon me that you don’t extend beyond your means,” she says. “I live by the idea of not buying things I can’t afford.” It’s part of the reason why she is cruising in a 2016 GMC Acadia. While she can afford a new car, she buys pre-owned certified vehicles, takes care of them, and then rides them until they are done. Her focus: to make sure she’s not carrying unnecessary debt into her financial future. The only debt she really has is one of her two homes.

While Bynum-Mincey and her husband use a financial planning tool through Fidelity, there are many online tools available. You can use an app like Mint, PocketGuard, or EveryDollar to do the heavy lifting; each offers a simplified approach to optimizing your spending. Financial consultant Roger Gainer, a fee-based planner that operates a fiduciary in San Rafael, California, employs a spending plan analyzer tool with clients to calculate what they can expect to spend less on (such as work clothes), while adding items like travel to their future lifestyle. “Break it down by the month, even if the expense only happens once or twice a year, like property taxes,” Gainer says. “Knowing how much spending you want to support will help you decide what income strategies you are going to need.”

Investigate budgeting formulas

A top fear of retirees is running out of money in retirement, according to data from New York–based asset management company BlackRock. One way to make sure this doesn’t happen to you is to develop a budget. Barker is a fan of the 50-20-30 budget rule, a term popularized in the book All Your Worth: The Ultimate Lifetime Money Plan, coauthored by US Senator Elizabeth Warren. Here’s how it works: Divide your after-tax income, allocating 50 percent to needs, 20 percent to savings, and 30 percent to wants and everything else. “Some budget formulas break your expenses down more, but overcomplicating things can make it difficult to stick with a budget,” says Barker. “Going with something simpler like the 50-20-30 rule makes it much easier to follow.”

Another popular calculation for determining how much you will need in retirement is multiplying your current annual spending by 25, says Barker. If your plan is to withdraw $100,000 annually from your retirement income, multiply $100,000 by 25, which equals $2.5 million, the ideal amount you’d want to have saved for retirement. This rule doesn’t account for income sources like Social Security, so calculate your spending accurately.

Factor in your life expectancy

On average, a 65-year-old woman can expect to live to nearly age 87, according to the Social Security Administration. That’s 22 years after retiring and three years longer than men. Given that women live longer, they will likely need long-term care for an extended period of time, which should be factored into expenses. “Living too long while incurring material health-care costs can drastically consume one’s spending budget and retirement assets,” says Herzog. “This affects what you must accomplish in your financial plan.”

Devise an income strategy

Gainer outlines several approaches that can help clients devise an income strategy: “The systematic withdrawal, or the 4 percent rule; the bucket approach, which is how pension plans do it; and the flooring approach, which uses guaranteed income strategies to provide income for the basics and luxuries,” says Gainer. He adds that knowing the amount of spending you want to support in retirement will help you decide on the best strategy.

One financial planning method advisors use is the Monte Carlo method, a complex set of illustrations that show “what if” scenarios. “At a high level, it’s about simulating thousands of return scenarios to establish a wide range of possibilities and weaknesses in a financial plan,” says Herzog. “For example, it might highlight that one’s plan only fails 10 percent of the time, and it is mostly driven by negative returns during an above-average period of spending.” Matthew Vitlin, a financial advisor with Northwestern Mutual in Austin, Texas, agrees, noting the purpose of this method is to determine how confident you and your advisor are about a particular outcome given different inflation rates, interest rates, and investment returns.

Next, consider how much your savings will generate. Vitlin says it depends on your risk tolerance. “The riskier you are, the greater returns you can expect,” says Vitlin. “The S&P 500, the 500 largest publicly traded US companies, has averaged between 8 and 11 percent before taxes and inflation, so women can expect to get 4 to 8 percent, depending on how they are invested.”

The long-term income strategy for Bynum-Mincey, outside of her 401(k) and stock options, is to invest in a fixer upper and rent it out. When thinking about an income strategy, there are some critical questions to keep in mind. “I asked myself, ‘What am I going to need when I retire? What type of lifestyle do I want to live? What do I want my retirement to look like?” says Bynum-Mincey. “It’s the reason why we are looking at the rental options.” Aside from having more time on their hands, the income will give the couple more financial freedom if, say, they want to travel, “I want to be in a position to be comfortable enough to do that,” she says.

Gainer says it’s less about how much you earn on your investments than it is about “how much income they produce and for how long.” He adds that women must take into account whether the income will be taxed and how much. “People get into trouble focusing on the rate of return in retirement,” he says. “That is the wrong metric.”

Speak to a financial advisor

As the world becomes more complex, don’t feel pressured to become a financial wizard yourself. Herzog says, “It is best to hire a financial advisor at an independent fee-only registered investment advisory to maximize the incentive alignment between both parties.” From there, clients should receive a comprehensive wealth management plan.

Selecting the right advisor is a process. First, decide on the level of advice and types of services you require, then look for professionals with designations such as CFA, CFP, or CIMA. A CFA is a common designation indicating a background in investment reporting and analysis, a CFP focuses on helping clients achieve personal money goals, and CIMAs specialize in strategic financial management.

Consider whether you prefer an advisor who is paid hourly, through a retainer, as a percentage of assets under management, or as a flat fee. Ask friends, family, and colleagues for referrals, then run a background check on potential advisors at FINRA’s free BrokerCheck service.

As you prepare for retirement, take it slow. “There is a lot to learn in this world, and it can get overwhelming very quickly,” says Vitlin. “You don’t have to master financial planning in an evening or a weekend.” By following these simple rules, you can feel safe and secure knowing that you have weighed the different financial options and figured out what makes sense for your future. DW

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BY TANISHA SYKES

Tanisha A. Sykes is an award-winning careers, personal finance, and small-business writer in New York City. Follow her on Twitter @tanishastips.