These four steps will give you a clear path towards a confident retirement.

1. Focus on retirement income—use this trick to figure out how much you need.

People tend to focus on their “retirement number,” or how much of a nest egg they’ll need to accumulate. Instead, the first step to retiring with money is to figure out how much income you’ll need.

Why is this important? Knowing how much income you’ll need provides the frame of reference to determine how much to save and where to save.

A quick way to estimate your retirement income goal is to start with your current income. Nobody wants to get to retirement only to have to cut expenses! Unless you are just starting your career and your income and lifestyle is still building up, using your current income is a good starting place.

The second step is to subtract out things you no longer need to pay/save for. For example, you might want to assume you won’t have a mortgage in retirement. Furthermore, you no longer need to be saving in your 401(k) once you are retired. Subtract these. This leaves you with your “lifestyle.”  You can also account for social security. Find your estimated benefit at full retirement age and subtract it from this amount.

What remains is the income that you truly need to be saving to replicate during retirement. But don’t forget about inflation! The final step is to take this amount and inflate it by 3% over the number of years until retirement. Inflation could be higher or lower, but this is a good estimate.

For example, we can use a 45-year-old making $150,000 as an example:

Current income: $150,000
Minus mortgage: $21,000
Minus savings: $19,500
= $109,500
Minus projected social security: $36,000
=$73,500 lifestyle goal
Inflated by 3% over 20 years
=$132,749

Thus, her retirement goal is to come up with a way to generate $132,000 per year.

2. Invest—and use a reasonable rate of return.

The next thing you’ll need is to invest in growth assets like stocks. Roth IRA’s and 401(k)’s give you the opportunity to do this while receiving tax benefits.

However, it’s important to use a reasonable rate of return estimate for your investments. After figuring out how much retirement income you’ll need, suppose you make a goal to save $3 million. If you have 30 years before retirement, how much do you need to save yearly? This depends on your rate of return.

The future rate of return of your investments is unknown. We can, however, use history as a guide to make projections. From 1926 to 2019, the S&P 500 returned an annual compounded rate of 10.2%. But over the past 20 years, it only returned 6.3% annualized. So, what rate of return should you use?  

It would be wise to use a lower rate of return when making projections. If you plan on making 12% per year, what happens if you actually get 7%?

Using our example, you need to save $12,430 per year to get $3 million in 30 years—if you achieve an annual rate of 12%. But if you end up “only” getting 7%, you will have $1.17 million—less than half of what you need!

Another reason not to use a high rate of return is you will not likely be invested 100% in stocks during your entire investing life. Stocks have a high degree of volatility, which is fine when you have several years before retirement. As you get closer to retirement, most people adjust their allocation to include less volatile asset classes.

3. Think about a distribution strategy.

Saving money and distributing money are two very different things that need different strategies! Even as a young saver, you can learn about setting up your retirement savings to maximize future retirement distributions. The next step to retire with money is to be smart about how you turn your retirement savings into retirement income.

For example, using an investments-only approach, a retiree can plan on taking out three to four percent of her nest egg per year. This approach maintains a high probability of success, but still depends on the market to perform well, especially early on in her retirement.

Retirees can also utilize insurance products—annuities and life insurance—to increase the amount of income they can generate from their retirement savings.

Think about our earlier example of the person wanting to maintain their current lifestyle of $150,000 per year. After subtracting out the disappearing mortgage, savings, and accounting for social security, we determined she needs an inflation-adjusted income of $132,749 from her retirement nest egg.

If she only relied on an investment portfolio of stocks and bonds in retirement, she would need to save close to $3.8 million (using a 3.5% withdrawal rate). If she planned on using an integrated approach of investments plus insurance products, she would be able to meet her retirement income goal with less savings. An immediate annuity, for example, could be used to provide an income rate upwards of six percent or more. She would only need $2.2 million devoted to an annuity to provide the same amount of income as the investments-only approach. Her remaining nest egg can continue to be invested, providing liquidity and future legacy.

Though you may be years away from retirement, you can prepare now to take advantage of an efficient distribution strategy.

4. Invest in your protection strategy.

Lastly, you want to make sure you are investing in a protection strategy. This includes protecting your income (disability and life insurance), your assets (property insurance) and liabilities (liability insurance).

Though this is listed last, it actually is the first step you should take.

There is nothing more important than protecting yourself and your loved ones. While insurance may seem like a cost, it really is an investment as important as your 401(k). An illness, accident, or premature death can ruin an unprotected financial plan.

Next Step—get your financial plan.

Everyone should be able to retire with confidence. The problem is it’s hard to know how much to save and where to invest. Not having a plan can cause anxiety and confusion. You might even feel guilty about not doing this sooner. When looking for an advisor, it’s hard to know if you are getting the best advice.

We believe a financial plan is what you need to remove the confusion and give you confidence to retire with money. A financial plan may sound complex and time consuming. The fact is, our time spent together is focused, and the end result is a simple blueprint for your money.

The first step is to schedule a video or phone meeting. If you decide to move forward, you will fill out an online profile and send us a few documents. Then, we’ll talk about your goals and the best way to achieve them!

Ready to go? Simply schedule an appointment with one of our advisors!