How Much Do You Need to Save This Month?

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There are a few critical financial planning questions you need to be able to answer. Probably the most important is, “How much money do I need to save this month to meet my goals?” Many people don’t know the answer to this question and avoid it to the detriment of their long-term financial well-being.

Most Americans spend more time planning their vacation than their retirement. At least with a vacation, most of us pick a date and actually plan to go. Planning for retirement should be every bit as planned and anticipated as your vacation. Assuming you’ll work in your seventies and eighties is not a retirement plan. Neither is dying young.

Without an adequate retirement plan, you will outlive your money. If your financial investments are not sufficient to keep pace with inflation, you will eventually lose your lifestyle and your independence.

Imagine you are driving 120 miles from Charlottesville to Williamsburg. For the first 60 miles of the trip you average 30 miles an hour. How fast do you have to drive the second half of the trip in order to average 60 miles an hour for the entire trip? If you quickly answered 90 miles an hour, you got the wrong answer.

You really can’t know if you are on track to retire without some complex mathematical projections. It is a difficult projection to eyeball and get right.

If a couple is approaching retirement with only $250,000 saved and a lifestyle of $50,000 per year, it’s not hard to tell they are headed for financial hardship. They only have enough savings to last for about five years. Their problem is worse if all of their savings are in tax-deferred retirement plans such as an IRA or a 401(k). That couple’s entire savings will be taxed at ordinary income tax rates when it is taken out, and therefore, it will be used at a faster rate.

Similarly, imagine if that same couple living off $50,000 per year has a $1-million portfolio. If you think a $1 million dollar portfolio is overkill, you haven’t really run the numbers and factored in the erosion of buying power that comes with 50 years of inflation (Thank you, Federal Reserve.).

When my grandmother was first starting a family, five dollars would feed her entire household for a week. She died at age 99 1/2. If you had told her she would need hundreds of thousands of dollars to have a comfortable retirement, she would have thought you were crazy. Many Baby Boomers are approaching retirement in a similar state of denial.

Going back to our example, the couple with a $1-million dollar portfolio probably has only twenty years of spending at $50,000. If their investments don’t earn a significant amount over inflation they could retire at 65 years old and be broke at 85. This lack of retirement planning is more likely to hurt the wife’s lifestyle and independence since she is more likely to outlive the family’s assets.

While young clients need to be able to answer the question “How much money do I need to save this month?” retired families must be able to answer the question, “How much money can I spend this month and still be financially secure for the rest of my life?”

If a family spends too much of their portfolio too early in retirement, they will not be able to recover. On the other hand, living on a shoe-string budget during retirement in fear of running out of money isn’t much better. In order to find the right spending balance, you need to do regular retirement projections during retirement.

Just as excessive spending early in retirement can jeopardize your retirement, so also failure to save enough early in your career can jeopardize retiring on time.

In our driving example above, driving 30 miles per hour for the first half of the trip makes it impossible to average 60 miles per hour, no matter how fast you drive the last half of the trip. Driving 30 miles per hour means that the first half of the trip takes two hours – the amount of time that the entire trip would have to be completed in order to average 60 miles an hour. You would need to drive 90 miles an hour for 180 miles – three times as far – in order to average 60 miles per hour for the entire trip. Put another way, a family who fails to start their savings quickly enough will also need to save longer to reach their retirement goals as well.

Find out today how much you should be saving and investing this month!

The original version of this article was published November 13, 2006. Photo used here under Unsplash Creative Commons Zero.

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.