Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about retirement; specifically, how to know when you’ll have enough savings to ensure a comfortable, happy retirement.
This is an interesting question for at least two reasons. First, it’s one nearly all of us will face. Second, unless you’ve got ridiculous amounts of money, there’s never any way to know for sure.
Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.
You also can learn how to send in a question of your own below.
For more information, check out “9 Tips to Ensure You’ll Have Enough to Retire” and “7 Mistakes Guaranteed to Ruin Your Retirement.” You can also go to the search at the top of this page, put in the word “retirement” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Our question today comes from Jane:
“I’m confused. I plan on retiring in about five years, but have absolutely no idea whether I’ll have enough. Is there any way to be sure?”
This is a question we’ll all face sooner or later. For me, it’s sooner: I’m already 62.
Let’s look at three things.
Thing No. 1: Figure out what you have
You know what you have in the bank, and you know what you have in your retirement plans. Add them together. Are you going to continue contributing the same amount to your savings every month between now and the day you retire? If so, add that in. Now you’ve got the total you’ll have to work with when that day comes.
Once you know your total savings, divide that number by your life expectancy. Example: Say you’re going to retire at 65 and based on the math above, you expect to have a total of $200,000 in savings. Your life expectancy at 65 is 20 years. Divide $200,000 by 20 years and there you have it: $10,000 a year.
Now you’ve got a very rough estimate of how much monthly money your savings will generate, providing you are willing to spend down your capital. Add to that Social Security, pensions and any other income you’ll have, and you’ll have an idea of how much you’ll be living on.
Keep in mind that you could add to your savings. For example, maybe you’re planning to sell your house and downsize. Or, maybe you’ll be inheriting. Or, maybe you’ll work part-time in retirement. Think it through. But at least you’ve got a quick back-of-the-envelope way to estimate what you’ll have.
Some will say, “Wait a minute! Aren’t my savings going to be earning interest while I’m retired?” Sure, but you’ve also got inflation to take into account. So, for a quick, down-and-dirty computation, let inflation and interest cancel each other out. Simply take what you’ll have in savings, divide it by your life expectancy, add what you’ll get from other sources, and you’ve got a quick number to work with.
Thing No. 2: Figure how much you need
If you don’t know how much you’re spending now, this is a great time to figure it out. Use some sort of budgeting app, or simply write down everything you spend until you have a handle on it.
All things being equal, you’re not going to need as much income in retirement as you’re spending now. When you’re working, you’re paying payroll taxes, commuting, buying clothes you probably won’t need in retirement — things like that. On the other hand, depending on how you intend to spend your retirement years, you could be spending more than you are now. Either way, confront your future.
After going through these two exercises, you’ll have an idea of how much your income and expenses will be in retirement. Of course, this was an exceedingly simple look. You can — and should — drill down a little more. There are calculators online that can help, but at least now you’ve got a starting point.
Thing No. 3: The sooner, the better
When approaching retirement, many people bury their heads in the sand. They’re afraid they’re not going to have enough and don’t want to confront it. So, they don’t do anything.
Dumb idea. Do something. Use online calculators, use the simple computation I just gave you — but whatever you do, do something.
Don’t feel like an idiot as retirement approaches and you don’t have enough. Now is the time to plan, because now you have options. Maybe you can put away more. Maybe you can get a side job and make more money, or maybe you can think about where you might be able to live for less when you retire.
The sooner you start confronting your retirement reality, the better off you’re going to be.
Make sense, Jane? I hope so.
Got a question you’d like answered?
You can ask a question simply by hitting “reply” to our email newsletter, just as you would with any email in your inbox. If you’re not subscribed, fix that right now by clicking here. It’s free, only takes a few seconds, and will get you valuable information every day!
The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
Got any words of wisdom you can offer on today’s question? Share your knowledge and experiences on our Facebook page. And if you find this information useful, please share it!
Learn everything you need to plan your dream retirement
The Only Retirement Guide You'll Ever Need gives you the knowledge you need to retire on your own terms. Sure, you can pay a financial adviser, but this online course gives you total control to create a custom retirement plan around the things that make you happy.
You're going to get expert, personalized advice. You'll have access to the latest tools. And when it's complete, you'll be able to approach your retirement confidently and with peace of mind.
It's time to plan the best years of your life. Let's get started.