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How Much Should You Save Now to Achieve the Retirement You Envision? By: Kevin Casteel, CFP® Trust Officer, Financial Planner
It’s impossible to pinpoint an exact savings amount that will provide you with financial independence later in life—that’s because so many variables must be factored into the “secret formula.” But that’s just it—there’s no universal “secret formula,” no “magic number” for how much people need to save for retirement. Every person’s financial situation is unique, no two scenarios identical.

To make it even more complicated, decisions about retirement usually aren’t made overnight. Whether you like it or not, it’s a process. Figuring out what you need to save for your future boils down to what you decide on these major issues:
  • What kind of retirement lifestyle do you envision?
  • When and where do you plan to retire?
  • How much income will you need in your retirement years?
  • What saving and investment goals have you set and need to maintain?
  • Are you able to find a balance between building a nest egg for a secure retirement and enjoying your current lifestyle?
Building a solid foundation for your retirement years early on allows for adjustments down the road as your plans and circumstances change. However, in reality, the estimated amount you need to save for your retirement depends on your answers to the following questions.

How Much Money Will You Need?

WHAT AGE DO YOU PLAN TO RETIRE?
Traditionally, individuals retire around the age of 65. About one out of every three 65-year-olds today will live until at least age 90—and one out of seven will live at least until age 95. Furthermore, married couples have a least a 50-50 chance that one spouse will live beyond age 90.¹ This means these individuals could be looking at a retirement period of between 25 and 30 years. 

If you plan on retiring earlier, perhaps at the age of 55, you could have 40 or more years of expenses to cover—which means you’ll need to be more aggressive when it comes to saving and investing. As advances in medicine and the health care industry continue to improve, longevity estimates keep climbing. In fact, at the rate current life spans are increasing, you could spend more time in retirement than you spent working!

WHEN DID—OR HOW WILL—YOU START SAVING?
The sooner you start saving, the quicker your money can get to work for you. Compound interest is key. The longer your money can grow, the more benefits it will provide you in the long run. 

Keep in mind small steps can have a significant impact over a period of thirty or forty years. That’s why it’s so important to start saving for retirement as soon as you can and maintain that habit over your lifetime. If retirement planning doesn’t begin until later in life, larger monthly or annual investment contributions may be needed to make up the difference—causing delayed retirement or financial distress. And, depending on your time horizon, the risk level and growth potential of your investments may vary.

HOW MUCH HAVE YOU ALREADY SAVED?
Take a look at the assets you already have earmarked for retirement. If you participate in a 401(k) plan, that’s a great start. Make sure you are aware of plan details and contribute enough to at least maximize the company contribution. Also, saving and investing outside of retirement plans adds flexibility and diversification for retirement spending.

Strive to put at least 10% of your compensation into savings. However, avoid relying solely on pre-tax savings to fund your entire retirement. Why? Because it will cost you $1.30 of pre-tax savings to get $1 after tax if you assume a 25% tax rate—so your $1.3 million pre-tax retirement account is really $1 million after tax.

In addition to saving in pre-tax accounts such as employer retirement plans or individual retirement accounts (IRAs), try to diversify your assets with regard to IRS tax guidelines by putting money in a Roth 401(k), Roth IRA, or an after-tax investment account. You’ll be glad you have the flexibility to fund your retirement from pre-tax and after-tax savings. 

WHAT ADDITIONAL SOURCES OF RETIREMENT INCOME DO YOU HAVE AVAILABLE?
Don’t forget to account for retirement income outside of your investments. For example, retirees may receive payments from sources such as Social Security, pensions, trusts, or home equity.

For example, let’s say you want an after-tax retirement income of $10,000 per month ($120,000 annually). If you figure $48,000 or 40% will come from Social Security, you’ll have to fund the remaining $6,000 per month ($72,000 annually). This projected income would require $2 to $3 million in savings, depending on the tax characteristics and asset allocations. Your financial advisor can take a look at your individual situation and help you project how much money you will have from all your income sources when you retire.

WHAT KIND OF LIFESTYLE DO YOU HOPE TO FUND?
To invest strategically for retirement, it’s important to have a good idea as to what your expenses will be once you arrive at that stage of your life. You should:
  • Have a clear understanding of your lifestyle you want to live and the budget it will take to maintain it.
  • Know where you want to live—perhaps you choose to move to a favorite place you’ve visited or to a lower-cost state or country with an attractive income tax rate or cost of living.
  • Decide what you want to do with all your time—perhaps start a second career, travel, take up a new hobby, or volunteer for your favorite charity.
  • Plan carefully for constantly rising health care and insurance costs.
  • Think about inflation—goods and services are likely to cost more in the future.
NEXT STEPS
Planning for retirement involves several variables. Share your answers to the five questions in this article with a Commerce Trust Company advisor to learn how we can create a financial plan to help you achieve the retirement you envision. 

¹ Source: Social Security.gov, “When to Start Receiving Retirement Benefits,” Publication No. 05-10147. January 2020.
The opinions and other information in the commentary are provided as of February 2, 2021. This summary is intended to provide general information only, and may be of value to the reader and audience. 

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. 

Past performance is not a guarantee of future results. Diversification does not guarantee a profit or protect against all risk.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. 


Commerce Trust Company is a division of Commerce Bank. 

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

 

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ABOUT THE AUTHOR

Kevin Casteel Trust Officer, Financial Planner Commerce Trust Company
Kevin is a financial planner with The Commerce Trust Company. He is a member of the financial advisory services team, a dedicated financial planning practice within Commerce Trust that provides objective financial advice to clients.  Following a thorough assessment of a client’s unique situation and thoughts regarding wealth, Kevin develops holistic and coordinated plans to help clients meet their short-term and long-term goals as well as take full advantage of various planning, tax, and investment strategies along the way.

His areas of focus include planning for financial independence, retirement, divorce, executive compensation, estate preservation, and business succession. Kevin joined Commerce Trust in 2015 after starting as a Commerce Bank Trainee/Credit Specialist in 2014.

Kevin received his Bachelor of Science in business administration and finance from Southern Illinois University Edwardsville. Kevin enjoys playing golf and baseball.
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