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Planning for retirement is inherently a good thing. After all, without a plan, you’re likely to come up short when it comes to building a sufficient nest egg. But many Americans approach retirement planning with a specific dollar figure in mind, rather than thinking of retirement as the personalized, one-of-a-kind lifestyle that it is.
Your retirement lifestyle should drive your financial planning, not the other way around. But what does that really mean? Here’s a look at common approaches to retirement planning and how the No. 1 step in the process often gets overlooked entirely.
$1 Million for Retirement?
The mythical figure of “$1 million for retirement” has been tossed about for so long that now it seems as if it’s the standard retirement savings goal. But while a $1 million nest egg would likely be welcomed by most Americans, it’s not a figure that should be universally applied to everyone.
Focusing on accumulating $1 million for retirement is the perfect example of how Americans often approach the process backward.Here’s a better way to handle retirement planning.
Imagining Your Retirement Lifestyle
Rather than saving some predetermined dollar amount, when you’re planning for retirement, think instead about your desired retirement lifestyle. You’ll certainly need money to pay for your retirement, of course, but planning out how you want to live when you retire is a good way to nail down just what that number should be.
Are You Retirement Ready?
For example, if you plan to fly around the world first class, go on luxury cruises and own a three-bedroom penthouse in Manhattan, $1 million isn’t going to cut it. But if you enjoy spending time at home with family and friends and prefer the small-town lifestyle in middle America, your number might be significantly less.
Regardless of which type of lifestyle you choose to lead, envisioning it in your head serves two important purposes. First, it can motivate you to save and invest throughout your life so that you can turn your dream retirement into your actual lifestyle. Second, it clarifies your financial target.
While there’s nothing wrong with shooting for a $1 million nest egg when your lifestyle suggests you’ll only need $500,000, there’s no denying that it can put stress on your budget. If you won’t be living a seven-figure lifestyle, you can enjoy your working years a bit more while still being on track for retirement. On the other hand, if it seems like you’re coming up short in your retirement savings because you plan to have an extravagant lifestyle, it’s better to know that sooner than later. That way, you might still have time to boost your savings and reach your goal in time.
Saving for Your Dream Retirement
Once you’ve outlined your dream retirement lifestyle, it’s time to do the heavy lifting. Thanks to the power of compound interest, however, the earlier you start, the easier it becomes to build a sufficient nest egg. Here are some examples.
Imagine that $1 million is the amount you’ll need for your retirement. Also, suppose that you can earn an 8% average annual return on your investments.
If you start saving $300 per month at age 20, by the time you’re 67 — which is full retirement age if you were born in 1960 or later — you’ll have about $1.86 million. If you wait until age 30, that same $300 per month will only get you to about $814,000.
Are You Retirement Ready?
If you’re only looking to reach $500,000 in savings, the process will be easier — you can either save less per month or start later in life. For example, if you only save $100 per month instead of $300, you’ll still end up with over $620,000 in your nest egg if you start at age 20. If you choose to invest $300 per month instead, you can wait until age 35 and still have over $532,000.
Either way, knowing the type of lifestyle you want to lead can help guide your savings and investment program, both in terms of when you begin and how much you’ll need to set aside.
The Bottom Line
Just because you have one type of retirement lifestyle in mind at one point doesn’t mean you can’t change it in the future. If your account balance starts to grow faster than you imagined, there’s nothing wrong with changing your vision of your retirement lifestyle. But thinking of your lifestyle first — and your dollar goals second — can help you not only build a specific investment plan tailored to your own needs but also drive you to reach your lifestyle goals.
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