What will your retirement look like? Are you worried that you won’t have enough money to live comfortably in your golden years? Do you feel as if your current financial obligations are preventing you from saving for retirement? If these thoughts sound familiar, then you’re not alone. A recent survey by the Investor Education Foundation found that 59% of Americans believe they won’t be able to retire when they want to. In fact, nearly two-thirds of respondents said they don’t think they’ll have enough savings by the time they stop working to live a comfortable life. However, that doesn’t mean there isn’t hope. In this blog post we’ll explore some of the future trends and predictions for the world of retirement planning.
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How Much Will You Need for Retirement?
Imagine you are a 50-year-old woman who has been contributing $200 a month to her company’s retirement plan for the past 10 years. You expect to earn around 7% annually (and are including any expected returns from company matching). You plan to continue contributing $200 per month until you retire at 65, at which point you will transition to the plan’s “income phase.” Your expected annual income from the $40,000 you’ve saved is $3,600 — a little more than $300 a month. If you want a “comfortable” retirement, defined as 80% of what you earn now, you’ll need to save more than $800 a month, or $10,000 a year. That’s just to maintain your current standard of living. If you want to increase your standard of living when you retire, you’ll need to save even more.
Expectations for Investment Returns
As we’ve discussed, there are many factors that go into figuring out how much you’ll need to save for retirement. The first and most important is how much return you can expect from your retirement savings. For example, if you want to replace 80% of your current pre-retirement income, you’ll need a nest egg that’s about 9 times larger than your annual expenses. For a more modest lifestyle, you’d need about 5 times the amount of your annual expenses. Let’s take a look at two different returns you might earn on your retirement investments: 8% and 4%. If you earn 8%, you can replace 80% of your current income by saving 10 times your annual expenses. If you earn 4%, you’ll need 16 times your annual expenses to replace 80% of your current income. So even though we’re talking about the same amount of money, the amount you need to save each year is much higher if you expect a lower return.
Millennials and Boomers: Shifting Demographics
The majority of people who participated in the aforementioned survey were baby boomers, ages 46 to 65. It’s no surprise that this generation — who watched the stock market soar, saw their houses soar in value, and then saw the market crash and housing prices plummet — is skittish about investing. But millennials, who only have the Great Recession to go by, have even more reason to be skittish. However, a shift in the demographics of the workforce is expected to change confidence in the market — particularly among younger workers who haven’t seen the boom-and-bust cycle of their parents. According to Transamerica, a good portion of the baby boomer generation is reaching retirement age — which means a lot of workers will be retiring. But millennials are expected to make up a majority of the workforce. So the average age of employees will decrease, and with it, confidence in the stock market.
The Importance of Diversification
Many people focus on earning as much as possible in their savings, with the assumption that the more they earn, the less they need to save. However, this isn’t always the case. For example, imagine two investors with $500,000 each in their accounts. One of them invested in a diverse portfolio and earned an average annual return of 6%. The other invested all of their money in stocks and earned an average annual return of 20%. The investor who earned a higher return still has to save more to meet the same goals as the investor who earned a lower return. The difference is that their portfolio is much more volatile. They win in the short term, but they risk losing it all the same. This holds true even in retirement, when the goal is to have a consistent amount of money entering your account each month. If you diversify your portfolio, you can mitigate losses in some areas while reaping the rewards in others.
Rule of 72: Estimate the Number of Years Until You’ll Be Retired
The Rule of 72 is a quick way to estimate how many years you have until you retire. Simply divide 72 by the rate of return you expect to earn on your investments. For example, if you earn an 8% return on your investments and want to know how many years you have until you retire, you can divide 72 by 8 to get 9. You’ll need 9 years until you retire. If you earn a 4% return, you’ll need 18 years until you can retire. Don’t get too caught up in the exact numbers — the point is to get a ballpark figure for how many years you have until you can retire.
Bottom line
The future is always a bit uncertain and unpredictable. Even so, there are definitely some trends worth keeping an eye on. The investment landscape is changing, with a new focus on artificial intelligence and the rise of robo-advisors. With the average retirement age on the rise, people are living longer and expecting to earn less income in retirement. With these trends and more, planning for the future is more important than ever. It’s never too early to start saving for retirement, and it’s always important to be mindful of the financial decisions you make along the way. Ultimately, with proper planning and a bit of luck, you can rest easy knowing that you’ll be able to retire comfortably.
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