Retirement planning is an important step in everyone’s financial life. You don’t need to have every detail worked out, but you should have an idea of what you’re getting into. Part of retirement planning is realizing it is a marathon, not a sprint, and different phases call for different strategies.
A mistake people can make throughout their careers is focusing too much on saving rather than investing. History shows that could be counterproductive to your retirement nest egg.
Determining how much you need in retirement
If there were a Magic 8 Ball that you could shake to have it reveal how much you’ll need for retirement, the planning process could be a lot more straightforward. Unfortunately, too many variables determine how much someone needs in retirement. The cost of retiring in San Diego will likely look a lot different than in Wilmington, N.C.
A common rule is the 4% rule, which says retirees can withdraw 4% of their savings in their first retirement year and then adjust accordingly for inflation every year without worrying about running out of money for at least 30 years. For example, if you withdraw $60,000 in your first year and inflation increases by 3%, you would withdraw $61,800 in year two.
The easiest way to see the 4% rule in action is by multiplying 25 by the yearly amount you believe you’ll need in retirement. In this case, if you need $60,000 yearly in retirement, your savings goal should be $1.5 million. If you need $100,000 yearly, the goal should be $2.5 million.
It’s important to understand the 4% rule is just a baseline and shouldn’t be taken as the be-all and end-all. In times similar to now, when inflation is high, it might make sense for retirees to lower their initial withdrawal to a range of 3.3% to 3.5%.
Being too conservative can be costly
Every investors’ risk tolerance is different, and this usually is reflected in their investments. Some investors prefer high-risk, high-reward growth stocks; others prefer value stocks. There are those who like dividend stocks; and some simply want investments with as little risk as possible.
The problem with that last choice is that the risk/reward trade-off usually means that investments with the least risk, such as fixed-income investments, also have very low returns compared to stocks’ potential.
The further away you are from retirement, the more the focus should be on growing your money as much as possible. This generally means focusing on stocks. There are no risk-free stocks, as there are with Treasury bonds, but there are stocks that are time-tested and have proved that they can provide value with relatively low long-term risks.
