In this part, let us remind you of the importance of attempting to grow your investment portfolio reasonably. Consider this… if you have ever played baseball, how many home runs did you hit? Or maybe as a spectator, how many home runs have your children or grandchildren hit on a consistent basis? So now you get it! Just as base hits are easier to get, a reasonable investment return probably stands a better chance to happen with possibly less risks. Let me say it again – if your retirement plan’s success depends on you hitting home runs with your investment portfolio, then stop that! Make adjustments now (save more, spend less, work longer if necessary, even consider working part-time during retirement, etc.). Keep in mind, a reasonable goal may be more successful if no more than a 4% to 6% long-term result could get the job done.
In Part 1 posted on 3/4/10 we discussed the benefits of a reasonable lifestyle, both today and during retirement. So let me illustrate to you what I meant and the benefits of spending within reason. Notice how much someone needs at age 66 to support a much higher standard of living. I would call this “living within your harvest.”
To illustrate, let’s make the following basic assumptions for a married couple:
— Current age of 55 and Retirement age of 66
— Combined Social Security income of $2,400/month (in today’s dollars)
— Growth rate on investments of 4% post-retirement
— Retirement period of 19 years (live to age 85)
— Current inflation rate of 3% annually
Based on these assumptions, someone may need to have accumulated the following amounts at retirement (Source: American Funds retirement calculator):
Living Expenses during Retirement —- Amount Required at Retirement (age 66)
$6,000/month —- $1,066,488
$10,000/month —- $2,158,247
Keep in mind this is just for simple illustration purposes, makes common assumptions, and assumes no market volatility. In real life, change is frequent and retirement assumptions, rates of return, inflation, etc. can vary from year to year. Plus, it’s very common that individuals will experience some type of unexpected need during their retirement years (such as increased medical expenses)… requiring more savings or a lifestyle change. Remember, everyone’s situation is different and should be monitored closely by a financial professional.
So what do you think? Which spending level can you truly afford?
The above information is for illustrative purposes only and is not intended to provide investment advice or portray actual investment results. Your financial situation and goals may change, so you might want to revisit the American Funds retirement calculator at least once a year. Be sure to discuss your results with your financial professional. The above information does not take certain factors into account, including early withdrawal penalties, required minimum distributions and holding periods. Regular investing does not ensure a profit or protect against loss. Hypothetical annual rates of return are not intended to reflect actual results; your results may vary based on market conditions. The above information compounds earnings annually and assumes that withdrawals are made at the beginning of the year. To access the American Funds retirement calculator go to https://www.americanfunds.com/retirement/calculator/.
Almost everyone I talk with, from young to old, seems to be worried about their future. Whether their fears have been heightened due to the economy, the stock market, or the political climate, their concerns usually center on “will I have enough” to retire. In other words, “What if I can’t work as long as I need to?” or “If I want to stop at some reasonable age, will I be able to?” So let’s review over the next several weeks what may help. With each entry we’ll try to address a strategy or “hot topic” that may be helpful.
Live Reasonably. Good marketers have done an excellent job motivating us to want more and more. But the truth is we can’t afford many things we spend our money on. So look at what you are spending (make a detailed list) and then ask yourself what kind of lifestyle you can afford, not just today but later. Next, start finding ways to spend less and save more. Remember, bad habits are hard to break. Reducing spending is almost like pulling apart human flesh. So don’t wait too long to start re-establishing good spending and savings habits. To develop & monitor your spending plan, consider using Quicken or the Mvelope System. And if it helps any, remember that most of the “rich” can’t afford the “yester-years” any more than the rest!