If you’re planning on retiring one day, you may be in for a rough surprise. According to management consulting company Aon Hewitt, the average North American worker, should they retire at the age of 65, likely requires about 11 years of their annual pay in order to pay for a retirement with an unchanged lifestyle.
In their 2012 study, ‘The Real Deal: 2012 Retirement Income Adequacy at Large Companies,’ Aon Hewitt also reported that for people hoping to retire a bit earlier – at age 62 – the amount of money saved should amount to 13.5 times annual pay.
And if that doesn’t yet sound intimidating, just plug in the numbers: if you live comfortably on a $75,000 total household income, and if you plan to retire at age 65, in order to maintain that standard of living in retirement, you would need to have about $825,000 in total retirement savings and investments. For a retirement age of 62, that number jumps dramatically to more than one million dollars.
Unfortunately, the average American doesn’t have enough money saved or invested for retirement; in fact, it’s not even close. A study from the Employee Benefit Research Institute this past March found 57% of Americans – up from 49% in 2008 – said they had less than $25,000 saved and investment for retirement.
With so many people facing a significant shortfall in their retirement savings, what is a Baby Boomer to do? What are the best and most effective ways to prepare a financial plan for the golden years?
Here are some handy tips which will help you better prepare for retirement:
1. Know your lifestyle: Many online retirement calculators are based on a premise that retirees will maintain a certain lifestyle after they have stopped working. Each calculation is different, but before calculating how much money you will need in retirement, ask what kind of lifestyle you plan on having. For example, if your current lifestyle has you vacationing, eating at upscale restaurants on a regular basis, and you expect to maintain that lifestyle after work ends, then don’t assume your budgetary needs will decrease. In fact, they may even rise. Conversely, if you plan to scale back your travel and entertaining in retirement, then you don’t need to assume your financial needs will be the same as they are now.
2. Know when you plan to retire: The longer you delay retirement, the less money you will have to save and invest for retirement, but it also means more time working. Every person’s priorities and professional goals are different, so consider when you would like to ideally retire.
3. Don’t count on government assistance: Although Canadians and Americans are offered government pension plans, many studies have shown these to be unsustainable, and many workers today may see the funds run out before they retire. So although it’s tempting to include this money in your retirement calculation, only count on your own money.
Although saving for retirement is one of the most challenging financial goals of Baby Boomers, it doesn’t have to be a struggle. Through self-discipline and planning, even the most ambitious retirement plans can be realized.