Where to start to determine how much savings you’ll need
Any financial goal typically has a price tag. Whether saving for a spacious home, your dream car, or family vacation, there’s a clearly defined amount of money you need to make it happen.
But what about the ultimate financial goal, your retirement? It’s the one every person needs yet seems to be the hardest to pinpoint. With so many variables and future unknowns, how can you determine how much you need to have to retire the way you’ve always imagined?
Online, you’ll find various calculators to estimate your retirement savings. Other guidelines keep it simple, recommending a total of $1 million or that you need 80-90% of your annual income in retirement. However, just like your dream retirement may differ from your neighbors, so also may the amount of savings needed.
“Do you want to dictate what you spend in retirement, or do you want your savings to dictate what you spend?” asks Cain Watters & Associates partner Hunter Satterfield in the latest season of the Accumulating Wealth Podcast.
For this and many other reasons, no single set amount or rule is ideal for everyone. Your savings target depends on several factors, and although one of them is how much you’ve managed to save thus far, the two elements that make the biggest impact are your retirement lifestyle and your retirement age.
Determine your retirement lifestyle.
Begin by creating a budget for retirement. Start with all the essentials that will not change: basic bills, property taxes and essentials.
Then, think of the costs that will likely go away, such as a mortgage, child-related expenses, or tuition payments. Factor in any income, possibly from the sale of your dental practice, part-time work or rental properties.
Finally, consider what you will actually do in retirement and how flexible you can be in discretionary spending on things like eating out, travel or simple things like a daily Starbucks run.
“Lifestyle is definitely the most important aspect to how much you need to retire,” explains Brian Bortz, a Cain Watters partner and CPA. “You have worked your tail off your entire life to accumulate everything you have and you should spend this money how you want to in retirement. Lifestyle is about balancing what you need to do and what you want to do. However, you can’t manage your needs nearly as much as you can manage your wants.”
As previously noted in our blog, in retirement your psychological portfolio must be as ready as your financial one. Take some time to plan exactly what you want to do in retirement and understand how this aligns with your financial path. Many of Brian’s clients discover that reducing lifestyle expenses brings happiness and focus to their lives—it also eases financial pressures.
That’s why understanding what is discretionary in retirement is vitally important as you create your financial plan. You can better dictate spending to achieve your wants.
What if you’re young? As CWA Founder Darrell Cain frequently says: “How does the 30-year-old know what the 60-year-old wants?”
It’s a great question. You may be uncertain about what retirement looks like. No matter how many times you change your mind, one tried and true rule of thumb applies: save as much as possible as early as possible. By doing so, you’ll take advantage of compounding growth so you’re better positioned to do whatever 60-year-old you will want to do.
Predict your retirement age.
Lifespan for people who live to be over 65 is growing by about three years for every generation, according to a 2018 study in the Proceedings of the National Academy of Sciences. That means your retirement savings will likely need to last longer than you may expect. In addition, whether you opt to retire early or late makes a significant impact on how much you need to save and any lifestyle adjustments you may need to make.
Timing of returns is important, too. Imagine the difference between retiring in 2008 during the recession and just a few years later. Setting a target retirement age is important but the more flexible you are, the more time you may have to grow your money.
With the right kind of financial planner, you can run several scenarios to help you pinpoint the right time to retire, along with an ideal distribution strategy that will make your retirement savings last as long as you need it.
“If you haven’t saved enough to retire at your ideal age, you have options such as finding ways to make income in retirement or waiting a bit longer,” reassures Brian. “When you look at the way money grows, there’s a doubling effect in the last nine years. The extra time can give you so much more financial flexibility and it’s often worth it.”
However, if you simply can’t wait to retire, consider adjusting your lifestyle or look for alternative income sources. Perhaps you could sell your practice and finance it over a period of time for guaranteed earnings. On the other hand, true retirement may bore you or have an unexpected emotional impact. Working one to two days a week could be a solution while bolstering your finances. Get creative and be open to possibilities for income beyond the usual sources like rental property.
Get to your number.
Whether you’ve just broken into the dental industry or you’re a seasoned pro, it is never too late or early to think about setting a retirement savings goal. Getting there is all about grasping these factors and knowing what realistic retirement looks like for you.
“Part of our role is to help clients see the choices they can’t perceive. My job is to tell you the ramifications of the decisions you make so you can get to retirement,” emphasizes Brian. “When you work with a financial advisor for a very long time, there is clarity as you enter into retirement. You’re empowered to make a fully informed choice.”
If you need help sorting through all the factors that will impact your retirement, CWA can help you feel confident in your choices and path forward. Reach out to create a financial plan that will keep you on the path toward a happy retirement, no matter what comes your way during your career.
Cain Watters is a Registered Investment Advisor. Cain Watters only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Request Form ADV Part 2A for a complete description of Cain Watters investment advisory services. Diversification does not ensure a profit and may not protect against loss in declining markets. Past performance is not an indicator of future results.
