The "Magic Number" for Your Retirement

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We all want the "dream retirement." Good health. The freedom to explore. The chance to enjoy everything for which we've worked.

There's plenty of clarity on the ideal post-work outcome. Yet most of us are foggy when it comes to the process of getting there.

The Employee Benefit Research Institute (EBRI) conducts a survey every year to gauge American views on retirement. This year's survey was the 25th released by the EBRI. It offers some interesting insight into the mindset of American workers.

According to the survey, only four in ten workers believe they need to save at least 20-percent of their income every year to achieve their retirement goals. Sadly, one-quarter of them had no idea how much they should save.

Given our tendency to delay, this confusion isn't entirely surprising. Yet is there really a sweet spot? A "magic number" for retirement savings?

There's really no hard and fast rule. Individual circumstances vary, as do conceptions as to what qualifies as a "comfortable" retirement. Yet it's a reasonable assumption that a 20-percent savings rate will protect your standard of living. If you start early enough, 15-percent may be enough.

Most of us will have a yearly disparity between our expenses and income in retirement. It's safe to assume you'll need at least $20 in savings to cover each dollar of that annual disparity. If your expenses are $25,000 a year greater than your income, for example, you'll likely need $500,000 in savings to close that shortfall.

Projections such as these offer useful yardsticks. Yet ultimately, the correct answer is much simpler. In fact, it involves no math at all.

You should save as much as you can. There is no magic number, yet that's as close to a "magic formula" as we have.

What about the late starters?

If you didn't get serious about saving until the flower of youth had long since bloomed, don't panic. Yet you should take action immediately. Time is of the absolute essence once you cross into your 40s and 50s. 

It's critical that you make the maximum contribution for any IRAs and 401k, if at all possible. If you don't have a tax-advantaged account, it's imperative you open one at once. There is one bonus for late starters -- the government allows "catch up" contributions. Older investors can contribute thousands more than younger investors. If you're in a race against the clock, you should seize this advantage.

Few things loom as large as your decisions regarding Social Security. If you can delay Social Security until 70, you'll grow your monthly benefit by one-third for the duration of your life.

That's a game changing difference for many of us. Yet delaying until 70 is often easier said than done. It's easy to say we'll delay when we're in our 30s, 40s, or 50s. Yet when we're actually of benefit-age, the temptation is much greater. It's no longer abstract. Claiming early benefits makes an immediate difference in our quality of life. We may rationalize it by saying we want to enjoy ourselves before we pass away. Or circumstances may force our hand.

Health is another looming challenge. Despite how fit we are when we're younger, we can't guarantee good health. No matter our intentions, sometimes late-life work just isn't possible.

If you can extend your working life, however, you should. Doing so allows you to make additional contributions while postponing withdrawals. That's an extremely effective combination. If you didn't start saving until 45 or 50, it could provide the final push over the finish line for a comfortable retirement.

There's another key factor many people miss. It's the mantra of any real estate agent: location, location, location. Where you retire has an impact on how much you'll need to prosper. Here are a few key factors that vary by region:

  • Sales and property taxes.
  • Median housing values.
  • Cost of living.
  • Taxes on Social Security or pensions.
  • Cost of amenities.

Remember, a successful retirement isn't solely about money. It's also about happiness. Relocating to an inexpensive city won't do much good if you're miserable. Yet if you're open to the idea, you can dramatically reduce retirement costs. The same applies for moving overseas. It might be a radical culture shift, but your dollars will go much further.

 The takeaway

There's no magic retirement number. Yet we can put ourselves in the best possible position by saving as much as we can. It's also important to make full use of tax-advantaged accounts and other government programs.

There's nothing magic about that formula -- yet it's proved very successful for millions for workers.

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