Have you seen the commercial from ING where the guy is out walking his dog carrying a sign with something like $1,086,532 in cut-out numbers? A neighbor stops to ask him, “What you got there?”
The man explains it is his number – the amount he “needs to save to retire the way he wants.” He notices his neighbor has a sign of his own…”$ GAZILLION.” “Is that your number,” he asks.
“How do you plan for that?”
“Oh, I blindly throw money at it…hope something good happens.”
Here’s a look at the commercial:
While it is sort of humorous look at retirement planning, I suspect it represents the sort of planning most of us do when it comes to far off goals. I have sat down a time or two to attempt to arrive at my own “number,” but it is rather difficult to predict what life may be like a few decades from now.
Save as Much as I Can
Up to this point my retirement strategy has been to “save as much as I can,” which reminds me a little of the gazillion guy. “Saving as much as I can” is not a viable strategy for retirement planning.
Instead, I should come up with a goal amount, a number, based on our current living expenses, project what our retirement income needs may be, and factor some unknowns like inflation, health care costs, etc. Now you see why arriving at a number is so difficult.
Then there is the daunting task of developing a savings strategy for reaching your number. The dog-walker in the video is a little older than me, so for simplicity I will double his number for example purposes.
Let’s pretend my number is $2 million. I’m roughly 25 years from traditional retirement age, so I’d need to save about $3,500 a month at 5% rate of return and 3% inflation, assuming I had no savings right now, to reach this retirement savings goal.
Just $3,500 a month, huh? No problem…just have to set aside a little after I pay the mortgage, the food, the utilities, put gas in the cars, etc, etc. Nothing to it. Yeah right.
You see why this gets overwhelming.
Now let’s assume I’ve been reading Frugal Dad the last four years and socking way a huge amount of savings. I have $100,000 saved towards retirement. With this starter savings amount in place, I only need to put away $2,800 a month to reach my goal.
That’s still a decent chunk of money, but I suppose if I pay off the mortgage early, take on a second job, and/or forgo things like eating and lights I might could scrounge up the money some years down the road.
By now I hope you understand the importance of starting early – particularly if you are reading this and your age begins with a 2!
This is how the exercise usually works for me. Rather than coming up with a goal number, I plug whatever seemingly small amount in I can afford to set aside each month for retirement, extrapolate out 25 years and see what the balance will be. The problem is, using this method I come up woefully short of my “number.” Sigh.
Determining Your Number
Much of the success or failure of this exercise comes from the first step – determining your number. There are plenty of retirement calculators out there that will help you arrive at this number. My suggestion is to use three or four of them and take the average. Most brokerage websites have calculators freely available, as do most major financial sites – Google is your friend here.
One drawback to these online calculators is that they make some pretty broad assumptions. It’s difficult to personalize the assumptions based on your lifestyle, your appetite for risk, your frugality, etc.
I often find the stated income needs in retirement to be much higher than what I really believe I could live on with no debt, no mortgage and a relatively simple lifestyle.
Take the results for what they are – a ballpark figure from which you can make adjustments to arrive at your “number,” or even better, your “Goal Retirement Range,” or GRR, an acronym I use to represent the range I’d be happy retiring on (and an acronym that adequately represents my feelings when trying to perform these retirement planning exercises – GRR!)
Your GRR may look like $600,000 – $800,000. Your neighbor may prefer a GRR of $1.2 – $1.4 million. It all depends on a variety of personal factors.
Just don’t let your GRR look like “oh, somewhere between $1 and $2 gazillion.” How do you plan for that?