First Steps in Creating Your Retirement Road Map

By: Carmen Wu

“If I can’t see it, I don’t understand it” -  Albert Einstein

It is never too early or too late to start creating your financial plan.  As Mark Twain said “The secret to getting ahead is getting started.”  By creating your retirement plan you can take control of designing your future retirement life style that fits your needs and wants. However, tackling the creation of your retirement road map is not without its challenges.


Consider these facts:

  • Fewer than half of Americans have calculated how much they need to save for retirement.  How much income will you need on a monthly basis to retire comfortably?
  • Individuals who save less than the average 10-15% will, probably need a higher pre-retirement income replacement ratio.
  • The average American spends approximately 20 to 30 years in retirement.  How many years will you spend in retirement? 

Understanding your retirement needs 

How do you begin figuring out your retirement income.  I will focus on the income retirement replacement ratio ongoing study by Aon Consulting.  Traditionally, assumptions for retirement income replacement ratios have been estimated to be approximately 70% to 80%. Income replacement ratio, generally refers to the percentage of pre-retirement income needed in retirement. For example, for someone who earns $100k in pre-retirement income that would mean they need $70,000-$80,000 in retirement income. They will need to plan for $$70,000-$80,000 retirement income need in year one of retirement.  Knowing what your retirement income number is critical in establishing your next step in retirement planning which is saving strategies.  How much you need to save to achieve your desired retirement income goal will depend on your spending and savings behavior.

The chart below illustrates savings examples of individuals age 25 to 65 of $10,000 per year for 40 to 10 year and returns of 2.25% and 6.5%. Your retirement income centers on your lifestyle which has a significant impact on how much you need to save.  The sooner you get started the more impact you will have in creating a road map to reach your desired retirement income goal.  You may find it helpful seeking advice in establishing a retirement plan and remember to review your plan annually.  

 

 

 

 

 

 

 


 

How long will you live in Retirement

“Growing Old is not an option.  We don’t have a choice.  But we do have choices that will greatly affect our quality of life for the rest of our life.”  Henry K Hebleler.

Another consideration is lifespans, since they are steadily increasing, thus increasing the amount of assets you need in retirement.  Today, the average individual can expect to spend about 30 years or more in retirement.  For a 65-year-old couple, there is a 50 percent chance one will live to the age of 90 and a 20 percent chance one will live to the age of 95.  Knowing that the longevity factor is not tipping in our favor you would be wise in being proactive in planning for your retirement.

 

 

 

 

 

 

 

 

 


Retirement Savings Challenges

According to JP Morgan, “The single most important decision individuals can make about retirement is to take responsibility for funding it themselves.” Traditional savings advice is to start saving early, save consistently and let compounding growth do most of the heavy lifting over time.  Yet, on average, individuals are saving well below 10-15% of their earned income. 
 


Success in retirement savings is about managing spending and savings behavior.  Generating additional income provides the opportunity to increase lifestyle and/or save.  Of course, at virtually any income level, there will be some individuals who spend more than they make.  It is advisable to commit to a strategy for income increases so as not to let lifestyle creep higher but instead save.  

Let me conclude with a quote from Richie Norton “If everyone waited to become an expert before starting, no one would become an expert. To become an EXPERT, you must have EXPERIENCE. To get EXPERIENCE, you must EXPERIMENT! Stop waiting. Start...”