Retirement is when having a good time is your only job.
~ Anonymous

I began dreaming of retirement the first day of my first job out of law school. Not that I did not like the job; I was actually extremely fortunate to land a position that had a reasonable work schedule, great benefits, and lots of paid holidays. I enjoyed the work and worked with good people. However, I would still have preferred to be sitting outside, drinking my coffee, and reading a good novel. How I dream for the day that becomes my reality.

When you're looking ahead at a 40 year career and dreaming of the day you stop working, your first thoughts are probably to consider where you are going to retire and what you will do in retirement, rather than how much money will you need to retire and how will you get there. Unfortunately, many of us realize far too late that we got it backwards. We must first consider how much money we can save for retirement and then, evaluate how we can happily live out our twilight years.

Most Americans are not saving enough for retirement. A recent AARP survey found that 20% of adults over 50 have no retirement savings. The Peak Boomers Impact Survey found that of the 30 million Americans expected to retire between 2024 and 2030, more than half (52.5%) of them have assets of $250,000 or less and will have to rely on social security as their primary source of income.

So, how do we ensue we save for retirement?

Start Early

The first, and arguably, most important factor for ensuring a robust retirement account is to start saving early. The earlier you start saving, the better, with the ideal starting age being 25. Even if you start by investing small amounts, small amounts invested early can grow substantially larger than big amounts invested later in life.

For example, an investor who starts investing $100/month at 25 will have a retirement balance greater than $640,000, assuming an annual 10% return, which is the average return of the S&P 500 over the long term. An investor who does not start investing until 35, but who is investing $200/month, will have almost $200,000 less in their retirement balance by age 65, despite contributing almost $25,000 more. Nevertheless, do not underestimate the power of saving any amount at any age.

This substantial increase in savings over time is due to the power of compound interest. Compound interest enables you to earn interest on both the principal and interest in your savings. The interest is added back to your principal and you earn more interest, compounding your returns.

Save Consistently

In addition to saving early, the rule of thumb is to save 15% of your gross salary. While difficult, and perhaps not possible to save steadily over your lifetime, there are suggested milestones you will to aim to achieve to stay on course. By 30, you should have your current annual salary in retirement savings. By 40, you should have two times your annual salary in savings. By 50, you should have six times and by 60, you should have eight times your annual salary in savings.

Save Thoughtfully

There is no cookie cutter approach to saving for retirement. Each person has their own vision of retirement – when they will retire, where they will retire, what they will do in retirement. What works for one person, may not be suitable for another. Therefore, you must establish a personal approach to saving by identifying what your potential future needs will be and strategizing on how to get there.

Some things to consider include:

• tax concerns (what type of accounts should you save in, when should you being taking distributions, how will taxes affect your beneficiaries)
• long term care (how will you pay for long-term medical expenses should you need extended care)
• providing for your family's needs (are you an older parent whose kids will be in college as you enter retirement, will you be supporting your parents with their retirement)
• anticipated and unexpected expenses (how do you envision your retirement lifestyle, will you spend more or less on an annual basis than when you were working, how will you pay for any emergencies – house repairs, family issues, health issues)

Save Enough

People often ask how much they need to save for retirement.  Again, this is very personal and requires contemplation of what your retirement needs and spending may look like. However, there are some guidelines to help you estimate the amount of money you will need in retirement.

• 80% of your preretirement income: Retirees can live on less than they earned during their working year because they are no longer paying Medicare and Social Security taxes or making contributions to a 401(k) or IRA. Because retirees are not working, they will have limited work related expenses, such as dry cleaning and travel costs. 

For example, if your annual income was $100,000, you will need $80,000 in retirement. If you collect $30,000 from Social Security and pension income, you will need an additional $50,000 in income annually. Assuming an inflation rate of 4%, and an after-tax rate of return of 5%, you should aim for a savings target of $1.3 million to fund a 30-year retirement that begins at age 67.

• 10x your annual salary by age 67: According to Fidelity, to maintain a lifestyle similar to the decade before retirement, a 45% income replacement target is sufficient. To achieve this goal, Fidelity recommends you save 10 times your annual salary by the age of 67. If you want an "above average" retirement lifestyle, increase that to 12 times your annual salary.

• The 4% rule: According to Morningstar, retirees can safely withdraw 4% of their portfolio in the first year of retirement. If you adjust future annual withdrawals for inflation, you should not run out of money under most circumstances. To find your target, multiply your projected annual spending by your projected years in retirement. If you need 60% annually and you anticipate 25 years in retirement, you will need $1.5 million.

Get Help If You Need It

You're not alone. If you haven't started saving or if you think you are not on track for retirement, there are various tools that can help you assess your needs. Check out this retirement calculator – you put in your assets and it informs you how much you will have vs. how much you will need at retirement, these detailed savings planning worksheets, and this social security calculator. However, to be certain you are saving enough and are protecting your assets, you should consult an investment professional.  

Investing involves risks, and no investment strategy can guarantee success. The information provided here is for general purposes and should not be considered as legal, financial, or investment advice. If you are interested in putting your retirement plan in order you should seek the advice of a certified financial advisor.