Your mindset is very important with respect to saving for practically anything, but it's especially important for retirement, because saving for a successful retirement is a "liability."
"Hold on. How is saving a liability?" you may ask.
We approach future goals as liabilities--a crucial concept to understand. Paying for your retirement is an obligation for which you must save in advance. As an example, let's say your goal is to retire on an income of $10,000 per month. You have several choices on how to save. You can pay for it now (up-front lump sum), pay for it over time (installment), or pay for it later (back-end lump sum). For most of us, saving for retirement over time is the most practical. Put plainly, if you want it and see value in it, you need to pay for it.
Next, we need to determine how much we should save and when we should start. Much has been written about the ideal savings rate during your working years, the ideal withdrawal rates during retirement, inflation rates, the optimal generic portfolio of stocks and bonds, and the rebalancing of the portfolio. The National Graduate Institute for Policy Studies analyzed the question and came up with the following scenario:
Suppose you plan to work for 30 years with your income rising with inflation and then retire for 30 years spending 50% of your final year's income adjusted for inflation. Your retirement is to be funded by a combination of Social Security and a 4% annual withdrawal from your retirement portfolio which is allocated in 60% stocks and 40% short term bonds. . . . The Institute found that you would need to save from 12% to 15% of your salary per year to fund the necessary portfolio.
The bottom line is that if you save 15 percent of your salary during your working years and withdraw 4 percent per year during retirement, you should be able to fund a retirement lifestyle of 50 percent of your final year's income. This is an impressive analysis, and I'm sure the math is accurate based on the assumptions. However, I have never met a client who fits these assumptions. There are too many life variables that take place over 60 years. Nonetheless, let's not lose sight of the significant point this study is making: Everyone should be put on notice that saving for retirement is a massive liability, and most of us do not comprehend the magnitude and importance of making the commitment early enough in our working lives.
Saving for retirement is a goal shared by all, and we should be aware that Uncle Sam will not be able to fund this liability for us. We are on our own. The big key to success in funding your retirement portfolio is to start early and make the mental and physical commitment to save over your entire working career. This should be the very first liability you fund with each paycheck you receive. It should be noted that the study mentioned above has the subject saving 15 percent of his salary for 30 years. However, if you waited 10 years to start saving, the corresponding savings rate jumps to 30 percent of your salary to achieve the same outcome. Saving for retirement is a very long marathon, so keep a steady pace and don't stop until you cross the finish line.
Dean J. Catino, CFP®, CPRC, is a managing director and cofounder of Monument Wealth Management in Alexandria, VA., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer. Securities and financial planning offered through LPL Financial, a Registered Investment Advisor, member FINRA/SIPC. Follow Dean and Monument Wealth Management on their blog Off The Wall and on Twitter at @MonumentWealth and @DeanJCatino. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for individuals. To determine which investment is appropriate, please consult your financial advisor prior to investing.
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