Do you know if you are saving enough for retirement?
Many people don’t have a clue.
And when they ask me, “How much money do I need to retire,” they are not too happy with my answer.
According to an ING survey, a third of people over 55 think they need to save $250,000 in order to retire. Another third thinks they need $1 million. The other third simply don’t know. With the average person’s retirement saving account balance an anemic $40,000. it’s no longer an option to be in the dark.
By the time you are finishing reading this article, you’ll know if you are on track or not. Here are the five warning signs that you may not be saving enough for retirement:
1. You don’t know what you spend. Notice I didn’t say that you don’t know how much your expenses are. You need to know what you spend and there’s a huge difference between the two. When I ask folks to tell me how much they spend, they often list their expenses. Unfortunately, most people spend much more than they think they do. Why? Because they spend money on things that aren’t included in their expense list. I’ve written about the importance of budgeting before, but I will tell you that unless you are willing to track your spending, you will probably not end up with the retirement nest egg that you want. Not tracking spending is like carrying water in a bucket that has leaks. All the water is gone by the time you get to your destination.
2. You have no emergency savings. The rule of thumb is that you should have between 3 – 6 months’ worth of emergency savings. That means having enough cash set aside to pay for all your regular living expenses for 3-6 months if you were to become suddenly unemployed. Start today by having a set amount of money – even if it’s just $25 or $50 per pay period – automatically withdrawn from your paycheck and deposited into a separate account just for emergency needs. Without an emergency savings fund you’re more likely to put everyday needs on a credit card (or borrow against your 401(k); see below) in the event of an emergency such as a job loss or sudden illness or disability.
3. You have stopped saving for retirement or borrowed against your 401(k) or IRA. If you’ve faced personal financial needs that have required you to dip into savings or to take a loan against your retirement account to get cash for emergency needs, then you may be at risk for not having enough saved for retirement. While it is understandable that in a crisis you need to temporarily make some different financial choices, it’s critical that when the crisis has passed that you get back to saving for long-term goals, namely your retirement. That means paying off the loan as quickly as possible to replenish the account and ensure that your funds can continue compounding interest as well. It also means restarting the automatic paycheck deduction as soon as possible if those were stopped.
4. Your assuming your expenses will drop when you retire. I can tell you that many people are banking on this happening and this may come as a surprise to many – your expenses will most likely be the same as they were before retirement. Why? When you retire, you’ll have more free time to spend money, so you will. You’ll have the time you always wanted to travel, take up art classes and more. It costs money. Also, inflation will continue to march on. Inflation is the economic term for a persistent rise in prices over time. To put inflation into perspective, a dollar 50 years ago bought you a movie ticket, while the same dollar today buys you one-eighth of a movie ticket. That’s inflation. Lastly, are medical expenses. Even after you qualify for Medicare at 65, you still have premiums, deductibles, co-pays and uncovered items such as glasses and dental. It adds up.
5. You’re over estimating what your retirement income will be. Let’s assume that you need $5,000 a month in income from your nest egg in retirement and that your savings will be $900,000 by the time you retire. Assuming that you withdraw funds at a 4% rate, that $900,000 nest egg will only generate $36,000 a year or $3,000 a month. That means you are still $2,000 a month short. So this indicates you aren’t saving enough money. How much more must you save for your retirement? Just do the math in reverse – divide the amount you’ll need each year by 4%. Need $50,000 a year in retirement? You’ll need to save $1,250,000. I think the reason more people don’t go through this exercise is because they are afraid of what they’ll discover – that they are not on track.
One of the most serious ways to tell if you’re in financial trouble for retirement is by honestly answering the question “are you fooling yourself?”
If you know that you are regularly spending more than you earn, incurring high interest credit card debt, having to borrow against your 401(k), etc. and you don’t take action to correct those problems, you’re not in a good place. Start by recognizing the financial red flags and put a plan in place to prioritize your financial needs and goals and pursue resources you can take advantage of to improve your situation. With perseverance and the right financial habits you can get back on track.
Be free. Nothing else is worth it.
P.S. Why aren’t you wealthy yet? It’s because of something you don’t know. Otherwise you’d already be rich. Isn’t it time to learn what you don’t know? Consider signing-up for my newsletter below, to help you build wealth faster.
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Ready for more tips on how to achieve the free life? Check-out more articles from the blog archives below: