Have I saved enough?
The one in 60 rule states that for every 60 miles you travel, every one degree you veer off course takes you exponentially astray from your final destination. To state it plainly, if you board a plane leaving JFK for LAX, and the pilot doesn’t adjust the course accordingly, you will end up 40 miles offshore in the Pacific Ocean. The same can hold true for retirement savings. When it comes to saving enough, it’s important to know if you are on track or not.
Here is how to get back on track:
1) Know the Coordinates
The question we have to ask to get us back on track is, “How much money should I have saved for retirement?” The problem with this question is, as you can imagine, the variables: current age, income, need, and the age at which you want to retire. The best rule of thumb I have ever encountered is what I call the Millionaire Formula. The following formula is credited to The Millionaire Mind by Thomas Stanley.1 It is a simple formula that anyone at any age or income can use. Here is how it works: Take your household income, multiply it by how old you are, then divide by 10. This is the amount you should have saved by now. For example, if you’re 40 years old and earn $150,000, 40 X $150,000 is 6,000,000, divided by 10. Therefore, you should have $600,000 saved. I recommend this formula because many families I’ve encountered say, “Andrew, I crossed the finish line; I have saved $1,000,000.” That is fantastic! It is a big accomplishment. However, they may be earning $500,000 a year and have been investing for 20 years; so that $1 million isn’t enough to sustain their lifestyle in retirement. What you need to save for retirement should be relative to you and your lifestyle. If not, when you retire you won’t maintain the lifestyle you’ve been accustomed to for very long. For example, if that client who earns $500,000 a year reduces his spending to only $300,000 a year in retirement, with a mere $1,000,000 in savings, he can afford only about four years of retirement.
If we are off track, the easiest way to get back is to add more fuel and return to the original path instead of settling for landing off course. Tony Robbins once said that “most people overestimate what they accomplish in a year and underestimate what they can achieve in a decade”.2 One of the easiest solutions to get back on track is to save more. I often suggest that a good goal is to be to save 20% of your gross income. By saving your gross income, you have a good chance of catching up because you are brute forcing your way back onto the path.
3) Tiny Course Corrections
Getting to 20% savings can be difficult to do overnight, but everyone can modify this next approach. We call it Exponential Saving, which is the action of committing every small increase in your income to your retirement savings. For example, perhaps you commit at least 50% of your next raise, bonus or promotion to your IRA or 401k. By slowly adjusting your habits, you can increase your savings rate to 20% before you know it — often without skipping on any current pleasures. When they find themselves off course, many people become discouraged and decide to settle for landing somewhere else. I hope you feel encouraged that it is never too late to get back on track. If you have questions about how much you should be saving and how to boost your efforts by investing, email me at Andrew@SWAN-Capital.com.
This information is not a solicitation to buy or sell any product. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM) and/or Swan Capital. AEWM and Swan Capital are not affiliated companies. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Investing involves risk, including the potential loss of principal. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. 655431-6/20 1 Thomas Stanley, The Millionaire Mind (Kansas City, MO: Andrews McMeel Publishing,2000 2 Tony Robbins, Awaken the Giant Within: How to Take Immediate Control of Your Mental, Emotional, Physical and Financial Destiny! (New York: Simon & Schuster, 1992).