If you are a business owner, corporate executive or similar professional, “success” often means at least two things. There’s the career satisfaction you’ve worked your tail off for. Then there’s that question that starts whispering in your ear early on, growing louder over time:
Am I on track to retire on my own terms and timeline? (And if not, what should I do about it?)
While every family’s circumstances are unique and personalized retirement planning is advised, the ballpark reference below can help you consider how your current nest eggs stack up. It shows the savings you’ll want to have accumulated, assuming the following:
• You’re saving 10–16% of your salary (or equivalent income) and receiving an annual raise of 3%.
• Your annual investment return is 6%.
• At retirement (age 65) you want to spend 40% of your final salary (with Social Security making up an additional 20–40% of the same).
• You plan to withdraw 4% annually from your portfolio.
Salary vs. Age vs. Desired Savings Today (To Retire at 65)
Still feeling a little overwhelmed by the size of the chart? Let’s look at some plausible scenarios.
Let’s say you are a 40-year-old couple earning $100,000 annually. The table suggests you should have saved about $317,000 by now. If you continue to save 10–16% of your salary every year and the other assumptions above hold true as well, you should be on track to retire at age 65 and replace 40% of your final paychecks by withdrawing 4% of your portfolio each year. If you’re already 50 and pulling in $200,000, your savings should be right around $1.067 million to be on track in the same manner.
Do your numbers not add up as well as you’d like? No need to panic, but it’s likely you’ll want to get planning for how you can make up the gap. That may mean saving more, retiring later in life, investing more aggressively or employing a judicious combination of all of the above.
If you’re not sure how to get started, I recommend turning to a professional, fee-only advisor who you’re comfortable working with. He or she should be able to offer you an objective perspective to help you decide and implement your next steps. In the meantime, here is one tip to consider.
How To Channel Your Salary Increases Into Retirement Assets
As you approach retirement, many business owners’ or corporate executives’ salaries tend to increase, while some of their expenses (such as the mortgage) remain level. If that’s the case and you’re behind on your retirement savings, you may be able to direct your annual salary increases into increased saving.
For example let’s say you’ve been saving 7% of your salary, or $10,500/year, and you receive a 3% raise. Take that extra 3% ($4,500) and direct it into savings. Without having to alter your current spending, you’re now saving 9.7% of your salary or $15,000 total. If you get another 3% raise the following year, do it again and you’ll be saving $19,635 or about 12.3% of your $159,135 salary.
And so on. If you can’t allocate all of every raise every year to increased savings, do as much as you’re able and the numbers should start adding up, without having to significantly tighten your belt. Who knows, as you and your spouse see the numbers grow, you may even begin to enjoy the exercise.
One repeated caveat before we go: Remember that the table above offers only rough saving guidelines. It’s certainly not the final word, and should not be taken as such. In addition to saving for retirement, you’ll want to ensure that the rest of your financial house is in order, so your plans won’t be knocked off course by life’s many surprises.
Again, a financial professional can assist. He or she can help ensure that your investment portfolio is well diversified (to manage investment risk), your estate plan is current, your advance directives and insurance policies are in place, and your tax strategies are thoughtfully prepared.
So, start with the chart, and give us a call if we can tell you more.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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