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Avoid Rules of Thumb When Retirement Planning For Budgeting or Anything Else

If you have done any retirement planning, and you should, then you’ve probably heard them.  Those comforting authoritative generalizations (sometimes baked into a free retirement calculator) that seem to provide a simple comprehensible and sound footing for assessing whether you are on track for the retirement you want.  Some common examples:

  • Set aside 10% per year for retirement
  • The equity component of your portfolio mix should be 100 – your age
  • You can safely expect to withdraw 4% per year of your savings during retirement
  • You should expect to spend 70% of what you spend before retirement during retire

There you go, every key topic covered, problem solved, we now return to your regularly scheduled programming.  But not so fast.  Are these correct for you?  Not likely.

budgets, retirement plan and personal finance blog
20+ years of your life is no game.

Even though they reflect some broad statistical truths, odds are vanishingly small that you are precisely statistically average and unacceptably small that you are “average enough” to just embrace these saws when estimating your required retirement savings.  Even trying to adjust for how you think you deviate from “normal” is a dicey proposition.  Small deviations can have a surprising impact on the results and not many of us are really able to accurately assess how “unaverage” we are.

Right now and for some number of years from now until you retire you have the ability to make choices that will effect the quality of your retirement for decades.  You can take steps and strive to earn more, save more, spend less, invest more or less aggressively.   When retirement age rolls around, these options are mostly off the table.  You can still work, but these are rarely peak earning years. The time value of money won’t be playing any major role in your investments and the effects of volatility will be much more painful and immediate.  At this point your lifestyle will be all but set based on decisions you made years and decades prior.

So maybe paying any attention at all to some feel good generalizations is a bad idea.  You need a retirement plan specific to your income, spending behaviors, assets, savings and investments right now and how they are likely change between now and retirement along with a solid understanding of how you want to live during retirement.  To know what to do now, I suggest you need at least the following:

Make Actual Budgets.  A Household Budget for now.  Additional budgets for times in the future when you think your spending might change significantly.  A budget for during retirement.  Make sure to (a) adjust them for inflation when you set them (e.g. if you lay out a budget and determine you want a $50,000/year lifestyle 15 years from now, realize that if we have 3% inflation from now to then the amount to plan on spending is $75,630) and (b) realize that those amounts will go up due to inflation each year after you retire.

Forecast Your Savings and Investments:  Estimate your income, how that will change over time.  Use the today budget above to estimate how much you will be adding to your savings.  Estimate the returns based on the kinds of investments you are comfortable making.  Forecast all the way through retirement to make sure you never run out.

Anything less than this and you very well may be sacrificing the opportunity you have right now to decide the kind of retirement you want.  There are some complexities involved but the good news is that retirement planning and financial planning software like FinanSavvy can do most of the heavy lifting for you.

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