How Do I Calculate Enough to Save for Retirement?

by on December 17th, 2010
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I am a goal setter. I like working towards something and when I accomplish it the reward feels that much sweeter. I use several goal setting tools (SWOT, SMART, and sponsorship). Today, I will cover all 3 approaches with the goal of retiring at 65 with enough money in savings to live at a certain level. That is a good goal which a lot of people have. The problem comes in when you ask “so how will you I do that?” The good news is you have a goal, now you need to figure out how to accomplish it.

Step 1. What does enough money mean to you? Retirement income is not a set number for everyone depending on lifestyle and personal factors. CNN Money has a great tool at http://cgi.money.cnn.com/tools/retirementplanner/ to figure out what you need per year in income based on what you make now. If I want to live on $30,000 a year and plan to retire at 65 and live to 85, then I need a minimum of $600,000 to retire. Now I have my amount to retire known and I can start to plan.

Step 2. SMART goal setting. For those of you confused SMART stands for Specific, Measurable, Attainable, Realistic and Timely. This is a checklist to see if you have a realistic goal in mind. If your goal can make it through these steps it is doable then you need to see if your willpower will get you there. Is it specific? Yes I have an amount I want to save for a purpose. Is it measurable? Yes, I can measure each month, quarter, or year how much I am savings towards my goal to stay on track. Is it attainable? If I need to save $600,000 in the next 32 years I need to save $18,750 a year or $1562.50 a month. WOW, well to put aside that much each month is not attainable for me, luckily I plan on investing in my 401K, IRA and other items that will earn me interest over time so that is less that I actually have to save. If I earn 7% on my investments I can get there at the level I am currently saving (same calculator as above). Is this realistic, depending on your calculations from attainable you should know the answer. Is my goal timely? Yes I have a deadline for it to be accomplished.

Step 3. Here comes my SWOT analysis. Again Acronym decoder, SWOT stands for Strengths-Weaknesses-Opportunities-Threats. First two are controlled by you (habits, income, and current savings), last two are outside your control (economy, inflation, outliers). Make a chart with a plus on it put one letter in each quadrant and write down your factors to saving money for retirement. An example might be: strengths- good income, long time left before 65 to save; Weakness-bad saver, job instability; Opportunity- 401k at work with company match, positive market growth; Threats- market may crash, unforeseen future expenses for parent care.

Step 4. Look at your SMART and SWOT is this still a goal you want to or can pursue? Can you adjust to make it more attainable through reevaluating how much you need per year to retire?

Step 5. If the answer to Step 4 is yes then share your goal with someone that will hold you accountable to the goal. This sponsorship will have a level of peer pressure for you to keep your word and reach your goal.

Step 6. Make whatever financial changes are needed based on your calculations to meet your goals. Enroll in your company’s 401K or start and IRA of some type. Set it up on a pre-tax basis so you do not even need to think about it you are saving every month.

The amount of money the government think I need according to social security is not acceptable to me and we are all aware of the financial issues that program is facing. I prefer to remain in control of my money and future so I plan and add to my retirement savings to allow myself to retire at an age when I am still young enough to enjoy it. Happy Financial Planning!


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