Once the decision is made to start a business it is probably a good time to start thinking about retirement. It may seem early but any advisor will, or at least should, tell you that it is much easier to put a little aside now rather than wait and have to try and put a lot aside later
How much will you need?
Everyone is different with different needs, so throwing out a specific number would not be very helpful. The only correct answer to “how much?” is “it depends.” Some of the factors that you need to consider include your current earnings level, spending pattern, debt level, and obligations. That last factor could be a big one, as it includes children (many baby boomers still have relatively young children, despite being close to “retirement” age) and parents who might need extra help. In addition to the current factors, you also need to consider what you expect to happen on all of the above issues in the future.
Figuring out what’s going on today is the easy part, but how do you figure out what will happen after you retire? The answers are almost limitless. For example, if you live in a $500,000 home, are you going to stay there or sell it? If you sell, you could buy a smaller home and bank the cash difference. You could also leverage yourself up with a mortgage and buy a dream home worth millions. The direction you go in would, obviously, have a material impact on your financial needs.
Many people in this country don’t have enough money put aside for retirement. Some may have $100,000 or more in savings. Even for a frugal person, that may not last more than a few years. You can add Social Security to the mix and home equity to brighten the picture, but that doesn’t change the situation materially.
Social Security is only meant as a backstop against poverty. Although it may live up to that expectation, most people expect more of their golden years. With regard to home equity, unless you plan on living on the street, you’ll still need a place for yourselves once you retire. As such, you can only count on a portion of that “equity” being available. In fact, a large percentage of people nearing retirement still have hefty mortgage payments, as they refinanced when rates fell. That would be good if they saved and invested the money, but most spent it.
The best answer to the question of “how much?” is probably “it depends, but it’s likely more than you have saved right now.”
That’s the fact most people have to face. The only viable solution is to ratchet up the savings rate. That means maxing out tax advantaged accounts available through work (4Olks) or on your own (IRAs), and saving on your own through various investment vehicles such as stocks and bonds. One thing to remember, don’t walk away and leave “money on the table.” If your company matches any portion of your contribution to a retirement plan you should be putting money into the plan. The money your company matches is free—why wouldn’t you take advantage of that found money?
Another point to consider is that you are likely to live 20 or more years in retirement, so you will need to be more aggressive than past generations when it comes to investing your assets. If you have too heavy an allocation to fixed-income investments (bonds), you could outlive your money, leaving you only with Social Security.
So, in the end, the answer to “how much do you need?” is “It depends, but you probably need more than you have now so you should save as much as you can between now and when you retire.” That may not be what you wanted to hear, but it’s the truth.
Like the A&E Channel it may be time well spent to sit and talk to your tax and/or financial advisor about retirement planning.
