You may assume that small savings won’t make a difference to generating retirement income. As a 50-year-old, I am aware of the good old days of company pensions. My mother and father both benefited from one. They knew nothing of how much to save or how to invest. They never stopped to think that the employer paid someone to do actuarial calculations to provide a paycheck for their employees after they retired. Pensions typically require an employee contribution. Employees typically talk more about the benefits they will receive versus how much they are required to save.
Calculating your needed retirement savings
Let’s use a hypothetical example to see how you might be able to create a future pension from a 401k or IRA. Assume you have 40 years until you retire and have a starting salary of $30,655. In the first year of savings you save a modest $3065. To make things easy, let’s assume you get a 7% rate of return. That return adds $214.59 to your savings. Furthermore, assume you get a 3% raise the next year. Then, on a salary of $31,575.35 you save $3,157.54. Your returns would now add $450.64 giving you a total balance of $6,888.33. After 40 years of the same assumptions:
Final savings $9,708.74
Portfolio Balance $960,464.77
Converting your retirement savings into retirement income
At age 70, you convert your balance into a single premium immediate annuity, fixed annuity with a 3% annual raise. Rounding up to $1,000,000, this would provide roughly $71,000 based on today’s rates from an A rated insurance company. If you are a woman, the payout would be bit lower as the insurance company assumes you will have a longer lifespan. If you are married or have a partner, you can explore options to turn this into a joint and survivor benefit.
You may say, but the market isn’t what it used to be. While we can’t predict future returns, we can control how much we save. Over the last 20 years a portfolio of 60% stocks and 40% bonds has returned roughly 7%. This is an average. There were both positive and negatives during this period.
Fine tuning your retirement income plan
While this isn’t the only way to create future retirement income, it is the simplest that adds guaranteed income with raises. Depending upon your investment returns you may be able to invest a portion to create your needed retirement income and use the extra for other discretionary uses. If you believe Social Security will still be around when it’s time for you to collect, you may be able to adjust your savings. If you have a company 401(k) and or if you qualify to make Roth savings, you may diversify how your retirement income is taxed.
A financial advisor with designations in retirement planning could be helpful
A Chartered Retirement Planning Counselor or CERTIFIED FINANCIAL PLANNER designee are two designations that require study and ongoing continue education. I believe you should find someone who is both knowledgeable and caring to help you. You need someone that can help you with your own calculations. You may need to tweak the savings, time period or return assumptions. Most of all, you need someone to help you maintain the consistent behaviors you need to show until it’s time to convert your balance into retirement income.
Note: Guarantees are based upon the claims paying ability of the issuing insurance company. This is a hypothetical example for general information only. It is not intended to provide specific advice or recommendations for any individual.
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 are subject to a 10% IRS penalty tax and surrender charges may apply.