According to Bloomberg, as many as 48% of Americans above the age of 55 had no money saved for retirement in 2016. Additionally, more than 40% of folks between the age of 35 and 64 will not have any money in their retirement savings accounts by the time they end their professional careers. These numbers are easily some of the scariest financial statistics that anyone who has not made retirement plans could come across. Entrepreneurs must be particularly attentive to their retirement planning.
Happy senior couple during the meeting with agent or financial consultant, signing some agreement in the comfortable officeFortunately, there are some ways to overcome the lack of financial responsibility related to non-existent or insufficient retirement planning. The key to doing so successfully, however, is to immediately stop wasting any additional time and get into financial strategizing that will help put an end to the crisis. The following 10 steps are a perfect summary of how you can relatively quickly determine how much you should be putting away in order to enjoy your retirement without any money-related concerns.
Step One: Figure Out Your Current Income Level
Before you can enter some more complex and important calculations, you have to figure out exactly how much you currently earn per year. This will include every source of income that you have in your life, not just your salary. In translation, if you are a personal trainer who also works as a rideshare driver as a side hustle, your gross income would amount to the sum of both values. This will also include any income from interest payments, bonuses, and selling odds and ends.
Step Two: Determine Retirement Spending Expectations
Once you have the income level, Dennis Farrah advises that you spend some time thinking about the way that you live right now. As someone who has worked as a retirement expert for decades, Mr. Farrah sees this as a perfect way to land at a reasonable retirement expectation. For instance, if you are presently bringing in a pre-tax income of $100,000 and live quite comfortably, you should probably plan to retire with around $60,000 to $70,000. Notice that the number is lower because you will not have as many expenses when you stop working and many of your debts will be paid off by then anyway.
Step Three: Project the Current Earning Level of the Rest of Your Career
Since you may be decades away from retiring, you need to project your annual income to all forthcoming years. This is where you would account for things like inflation, raise expectations, and market conditions. Try to stay on the conservative side and undervalue the increase in your salary by at least 10%. For example, if you are currently making $60,000, the salaries rise by 5% in your company, and you have approximately 30 years until retirement, you will earn a total of almost $4 million.
Step Four: Project the Total Value of the Needed Retirement Fund
After you have the total career earnings, project your total retirement value by multiplying the annual amount by the number of years you expect to be retired. If you intend on spending $100,000 per year and think that your retirement will last around 20 years, you will need $2 million.
Step Five: Research Retirement Investing Return Rates
Although $2 million may sound overwhelming, financial expert Dennis Farrah reminds that it is not. The reason why is that there are interest rates that will help you reach that amount with a relatively low initial investment or monthly subtraction. To get closer to the true value, however, you need to know the average rates of returns on common investments.
Step Six: Reverse-Engineer the Expected Retirement Based on the Average Interest Rates
If you decide to go with a mutual fund that has a ten-year average of 11%, which is fairly common in today’s market, you need to reverse-engineer the formula to see how much money you must put down right now or add per year. For consistency reasons, we will use the same example of a person who will retire in 30 years. In their case, investing $87,365.63 right now would grow to $2 million by the time they retire. Hence why the seemingly large numbers are nowhere near as scary.
Step Seven: Calculate the Necessary Payments
If you do not have $87,000 that you can invest right now, do not feel bad. Simply calculate how much you need to contribute per year by solving the compounding interest formula for the “payment” amount. In this case, it will result in $10,049 per year for three decades. That means that you should put an additional $10,000 in that mutual fund every year until you retire.
Step Eight: Divide the Annual Amount by the Number of Months or Pay Periods in a Year
To see how much you will have to contribute monthly, divide the previous amount by 12. Doing so is extremely helpful as it shows you exactly who much your checks will be reduced by. Based on the $10,000 contributions from above, you should expect a monthly deduction of around $837.
Step Nine: Consider the Reasonableness of the Calculation
If $837 is more than you can handle, you need to think about the reasonableness of the initial estimate. The reason why is that the $100,000 per year during your retirement does not seem to be attainable at the moment. In case you do not want to change the end-amount, simply consider contributing less right now and then increasing your monthly deductions as you earn more later on.
Final Step: Make Final Edits
When there is no way to make the necessary monthly payments, you will have to make edits to your calculation. To do so, you must go back and lower retirement expectations. Afterward, go through the aforementioned steps again and see if the new figures are more attainable. If they are, congratulate yourself because you just calculated one of the most important numbers in your life.
