Why You Need a Large Nest Egg to Support Secure Retirement
Struggling to determine how large a nest egg you need to ensure that you’re secure throughout retirement?
According to Anora Mahmudova, writing for Market Watch, “While many Americans know if they’re putting money aside for retirement, few can tell with confidence how much money they should accumulate to maintain their lifestyle after they stop working. Over 80% of Americans say they don’t know how much money they’ll need for retirement.”
It’s a pretty common situation, but the answer varies from one person to another. Retirement planning is very much an individual situation. What applies to you may or may not apply to another person.
What steps should you take to ensure that you’re actually saving enough to maintain your pre-retirement quality of life?
Estimate Your Future Spending When Calculating Your Nest Egg
One of the most important considerations here, and one that too many would-be retirees neglect, is to estimate the amount of future spending you’ll be doing. You can’t really count on your expenses to stay the same after you retire – things will definitely change.
Start off by examining your current spending – add up all the things that you spend money on each month right now.
If you have variable expenses, come up with an average and use that amount. Once you have that list, figure out how each item will change when you retire. Will those costs increase? Will they decrease? Will they disappear completely?
Out to the right of each item, write the new estimated amount. Don’t worry if this is not 100% accurate. We’re creating a rough forecast, so complete accuracy isn’t necessary. You just need a rough idea.
Now, take all the new estimated costs and add them up. This is your estimated monthly spending once you reach retirement age. Multiply that amount by 12, and you have the amount you’ll be shelling out per year.
Using That Number to Plan Your Nest Egg
Now that you know your estimated annual costs, you’ll need to use that number to plan how much income you’ll need every year, and every month during the year. This will have a direct impact on the size of the nest egg you need to create.
The general rule of thumb here is that you need to plan to have about 80% of your preretirement income available to you during retirement.
Note that “preretirement income” is actually the average of what you expect to earn in the decade leading up to retirement, not what you’re earning right this moment.
You’ll need to account for the amount of that income you’re currently setting aside for retirement – after you retire, you no longer need to worry about that.
By this point, you should know the amount that you need to have socked away to live on in retirement. You’ll be drawing from this nest egg each month, while it simultaneously grows based on interest and earnings from your portfolio.
If things are going well, then the growth and spending (from your withdrawals) will be equal, leaving your nest egg largely untouched.
In a perfect world, your portfolio will earn more than you withdraw, putting you in a more secure financial situation.
Don’t Save 15%
Quite a few financial planners and investment advisers urge their clients to save about 15% of their annual income for retirement. I’m going to say “no”. You need to do more.
My recommendation is that you save 20% of your annual income.
Otherwise, you don’t stand a chance of making it through, particularly with the way interest rates are behaving, and the fact that living on the recommended 3% withdrawal rate would probably not allow you to live the lifestyle to which you’ve become accustomed.
Avoid Spending Your Nest Egg before Retirement
You might think that this is sounds strange – who in their right mind would dip into their retirement nest egg to cover other expenses? That money is supposed to be completely off limits, isn’t it? It is, but a lot of people dip into it for any number of reasons.
Money can get tight. Perhaps you encounter unexpected medical bills, or your spouse does. Maybe your son or daughter is struggling to pay for college.
Don’t do it. Your retirement funds need to stay sacrosanct. Don’t dip into them for any reason at all.
Use the Right Investment Strategies
Investment strategies are literally a dime a dozen these days. You’ll find proponents of just about every vehicle, from stocks to ETFs and more. The truth is that these can offer growth, but what they don’t offer is stability and protection.
My recommendation is to use the right investment websites to ensure that you’re able to pad your retirement account with bonds. And, I mean legitimate bonds here, not bond funds or other risky financial tools.
Creating a bond ladder allows you to build a financial plan that offers calculated payouts at known periods for months or even years ahead.
This ensures that you can plan your retirement accurately, while knowing exactly what you’ll be earning and without the risks that come with playing the stock market. Is growth slower with bonds? Yes, usually.
However, that’s a small tradeoff for the peace of mind you’ll enjoy when you don’t have to worry about the roller coaster that is the stock market.
Ultimately, determining how much of a nest egg to build for retirement is an individual thing – there’s no one size fits all approach.
You need to know your predicted spending, the time horizon for retirement, your income needs during retirement, and then use the right tools to ensure financial stability throughout your gold years. Anything less will leave you wanting.
In addition, Robo-advisors can help reduce your investing costs while ensuring accuracy, peace of mind, and, ultimately, a comfortable retirement.