What Should Your Retirement Savings Target Be?
- June 4, 2019
Understanding your retirement goal based on internal and external factors
If you ask most people what they plan to save for retirement, you almost never hear an exact number. Some might say $1 million, some more, while others have absolutely no idea. While retirement savings plans are meant to build slow, predictable wealth accumulation, the reality is that there are countless factors that will impact how much a person has (and needs) in retirement. Therefore, determining your target goal for retirement savings is a lot more complicated than it seems.
Main Factors
There is perhaps no bigger unknown than the rate of return your retirement investments will yield over time. Market conditions, your employment status, and portfolio allocation are just a few of the myriad of factors that can impact how much you earn against your savings goal. Trying to predict that is like predicting the stock market thirty years from now.
Similarly, predicting how inflation and the cost of living will change over time is almost impossible, even as inflation rates have averaged around 2% over the last twenty years. $1 million saved now might seem like a lot today, but could translate into a very different lifestyle thirty years from now due to inflation. One would hope that your salary and other earnings would rise with rate of inflation but nothing is guaranteed.
Calculating your living and income requirements in retirement is another area that requires some crystal ball gazing. Especially if you are young or just starting to save for retirement, forecasting your income needs decades from now is quite a challenge.
So what is the solution? Forget the big number. Instead of thinking of your retirement savings goal as one big number – try to break that number down in connection to your life goals. For instance, if you have any idea about where you might want to live or what type of house you want to live in down the road, that can go a long way towards long-term retirement planning. Setting a retirement goal doesn’t necessarily mean sticking to one large monetary goal; instead, try to incorporate retirement savings into your goals for today. Get into the habit of setting aside a certain amount of your income and savings each month towards retirement. You’ll find that over time, your retirement contributions will grow alongside your wealth accumulation and income. By doing this, you’re ensuring that your retirement savings target, whatever it may be, reflects who you are as a person as well as your long-term financial goals.
Whether you’re thinking about retiring next year or in thirty years, a Financial Advisor can help you map out your retirement goals and come up with a plan to achieve them.
