Rosanne: I am inundated with articles about how we’re not saving enough for retirement. My question is, how much is enough? How much should one save or have saved at a particular age, let’s say age 62? Financial experts talk about the problem, but no one gives such guidelines. Of course, you cannot know how long you will live and what diseases you will get. But excluding protracted, terminal illnesses, how much should one save?
Phil Moeller: I have long felt that most retirement readiness indicators are not very useful. Even providing a dollar figure is of little value without being related to a detailed profile of a person’s financial, health and family situations.
The purpose of retirement savings is to fund a person’s life style for the rest of their life when they retire and are no longer bringing home a paycheck from work. Rather than toss out a number, I suggest that people build accurate retirement spending budgets. These budgets usually have different spending categories — essentials, discretionary items and legacy expectations.
The ideal retirement plan is to have enough guaranteed money coming in every month — from Social Security, private pensions, annuities, and the like — to pay these fixed expenses. This way, you’ll never have to worry about having enough money to afford housing, food, utilities, healthcare, insurance and other “must-spend” items.
If you aren’t going to have a lot of guaranteed income in retirement, then you need to sock away more money.
Your retirement savings come next. Ideally, the earnings from these savings would be enough to pay for travel, new cars every several years, restaurant meals, spoiling grandchildren, and other things you want but can live without. If you have enough guaranteed income that you do not have to spend down your savings, you should have extra money to pass on to your heirs (and whatever social causes matter to you).
If you aren’t going to have a lot of guaranteed income in retirement, then you need to sock away more money, and vice versa.
So, thinking ahead to your 70s and beyond, I’d build a budget for the “future you.” I’d then look at the source of funds for that budget and work backwards to how much money I would need to set aside today to satisfy my future needs. It can be deceptively easy to assume you will need less money in the future than you now do. However, many people wind up spending, or at least wanting to spend, more money when they retire.
I know this is not a specific number but hope you understand why.