I’m 30-Something: Retirement Financial Planning Essential So Working to the Grave Isn't Inevitable?

Like many people, my wife and I have been putting away a fair amount of money into our 401(k)s, individual brokerage accounts, custodial accounts for our child, as well as a few rollover/ Roth IRA type portfolio accounts. Through one of those weekend warrior financial advice radio programs we “learned” that if we want to be able to retire and live the type of life we are accustomed to, we need to save 20% of our GROSS income. Yes, you read me correctly. We aren't responsible for saving money based on what we bring in after taxes and other pay reducing expenses, we actually need to rely on one fifth of the theoretical only GROSS income number. Does this seemingly ridiculous percentage really say to us that the concept that we traditionally have known as retirement is a thing of the past?

To be fair, this is a number that is advised because we are “supposed” to be maxing our 401(k) annual allowance of $16,500 as of 2011. This of course is also predicated by the concept that our employers are contributing in some form of a match based on a percentage of what we contribute to our plans. In tougher economic times like we face today, many company’s are forced to cut back in areas, and often times these cutbacks include, to a large degree, employee “perks” like the 401(k) match. Some companies eliminate them all together; others reduce the percentage matched and/ or lower the yearly match cap. We as employees ourselves are also forced to cut back what we can save because of higher gasoline prices, unemployment, and rising health care costs just to name a few. All of these things along with our human weaknesses for self discipline contribute to the likelihood that retirement at a reasonable age will be a difficult thing to achieve. Before we can even know where we are, we need to establish how much we will need to retire comfortably which by it self is a daunting task filled with a wide degree of variables and unknowns.

For starters, we need to determine how long we think we are going to live; a variable that can be influenced by a healthy lifestyle but yet is still a rather subjective calculation. Once we have sealed our fate, we then must choose a starting point age goal by which we would like to retire, start optimistically! Next, we need to take inventory of our assets and debts to determine our savings starting point. I always assume that Social Security will not exist in 30 years, the time by which I would like to retire, so I do not consider it into the calculation. From here, put together a detailed budget for where you spend your money and your earnings on a monthly basis and get a feeling for how much of your take home pay can be dedicated to retirement. You may need to cut out a few restaurant visits or six packs here and there to free up some space! We all have to make sacrifices to reach the Utopia of Retirement! So now, based on your hard work, we can do some scratch analysis of how much we need to save, how much return on investment we will need, and how long it will take to reach our goal. Below, I will demonstrate some calculations based on some assumption about the information discussed. These are all fictional and in now way reflect my own position of course! Get a financial calculator!

Yearly Retirement Need (pre-tax): $100,000

Total Retirement Need (today’s USD): $2,000,000

Expected ROI (Annual): 10%

Calculated monthly Savings Required: $2,254.00 = 23% of Gross Income

Analysis: Assumed ROI is too low, required retirement income too high, retirement age too high or all of the above

Yearly Retirement Need (pre-tax): $100,000

Total Retirement Need (today’s USD): $1,500,000

Expected ROI (Annual): 10%

Calculated monthly Savings Required: $1,471 = 15% of Gross Income

Yearly Retirement Need (pre-tax): $90,000

Total Retirement Need (today’s USD): $1,350,000

Expected ROI (Annual): 10%

Calculated monthly Savings Required: $874.00 = 9% of Gross Income

As can be seen in these 3 scenarios, there are many variables that can be changed to meet your retirement goals. One thing we haven’t yet factored in is inflation. In other words, our required retirement funds are expressed in the value of money today, not it’s purchasing power 26 to 31 years from now. So how much will this affect our savings needs? Let’s assume that the annual rate of inflation will be on average approximately 4% based on historical consumer price index (CPI). How much will $2,000,000 in 26/31 years be worth in today’s dollars? Using my trusty HP 12c financial calculator, the number comes to about $721k for 26 years and $445k for 31 years. Yikes, that means that if we retire when we are 62 years old and die when we are 82 based on the above calculations, we will need to be able to live on about $36k pre-tax. To retire at age 67, we would need to be able to live on about $30k pre-tax per year.

Of course, this gloom and doom scenario also does not account for yearly performance raises, our spikes in pay when we changes jobs or get promotions, winning the lottery, family inheritance as well as a myriad of other factors not to mention our ever changing tax codes. Come to think of it, referring back to our old pals on the financial planning radio programs, the 20% number is supposed to be saved before we do any separate savings for our children’s educations, vacations, extra curricular activities, and any other frivolities we may wish to cushion our lives with. So, is retirement the way we now know it possible for those of us in generation x-y-z? Sure! Could it be that traditional retirement is a thing of the past!?! Absolutely! All I know for sure that as humans we will adapt to the challenges put before us and we will reach for the sky in order to fulfill our pursuit of happiness, comfort, and a graceful transition into “retirement”. So, go out and win the lottery, get adopted by someone wealthy, or on better thought, see a financial planner. There are far too many variables to consider to base your future on what you “think” will be enough savings 30 years from now. Good luck!