I understand that there are more variables than can be accounted for with retirement planning and that any adventure into this is clearly a large estimate. I am going to be working with my students on retirement planning and for that I need a reasonable number for: you need to have $X per month in income through your retirement plan + social security given the average salary in your chosen field.
For the Social Security benefit I am assuming they will be making the average salary at the midrange of their career- specifically age 45. As for how much they will need per month in retirement, I have seen referenced to 80% of your monthly pay although no clue if that is pre or post taxes. So would taking the average salary in their field, dividing by 12, then multiplying by 0.8 give me a reasonable approximation of what they need to have in retirement? Anyone have a better idea given the limited knowledge a high school student would have about their future income + expenses?
And do not rely on Social Security as the primary income during retirement. It should only account for a third, or less, of retirement income. That means one must develop future income streams right now while working, be it Roth IRA, Roth 401(k), or other investments.
Well in retirement you should have your house paid off; you should no longer have expenses raising kids; you should no longer have expenses associated with work (commuting, business clothing, noon fast food/restaurant lunches); and since you have plenty of extra time you should be able to do lots of things yourself which you previously hired someone to do.
The lower your overhead, the less money you’ll need, so PastTense is right on with his advice. If you live in a community where you’ve been paying fifteen large a year in property taxes because you wanted your kids to go to the best schools, then you need to move and downsize your home, thus saving money via mortgage and property taxes.
I don’t need a lecture on how to save for retirement. I need to see if my mathematics given extremely limited data can give reasonable estimations.
Please see my OP. It has nothing to do with “Please help me plan for retirement.” but does this math reasonably resemble retirement planning numbers.
It is in GD because with all of the variables involved someone might say plan to need 60% of income or average salary in the field is achieved at age 50. But again this in not about help me plan my retirement. Just comment on the math and assumptions in the OP.
Again - not looking for advice. Looking for how accurate my assumptions are for the simulation my students are going to run.
Do you have a financial adviser? Given your question, I’m thinking not. In that case, it would be worth the expense needed for a professional consultation.
Why? Again I don’t need financial advice on how to prep for retirement. I just want people’s input on if my math would make a reasonable simulation for my students.
Please quit lecturing me on this. That’s not my question.
There’s so many variables in retirement that you don’t necessarily need to be exact. If you have a lot, you’ll have a luxurious retirement. If you have a little, you’ll have a frugal retirement. It is possible to live on just SS alone, although your quality of life will be low. And in the decades between now and when the kids retire, inflation will change what things cost. Plus, they will probably forget a lot of the details from this exercise. I did this back in HS but forgot the details. The exercise was useful to get 18-year-old me thinking about saving for retirement, but I can’t remember what the specific saving criteria was.
OP, just do a Google search for what various retirement experts are recommending–since people here want to give specific advice depending on your particular needs.
I see numbers like:
70% is often cited as the minimum rule of thumb for basic needs, assuming lower expenses in retirement.
75% to 80% is a widely accepted target for maintaining your standard of living, especially if you want more discretionary spending or travel.
Up to 85% may be appropriate if you expect higher healthcare costs, want to be more conservative, or plan for a more active retirement.
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That’s what I did and where I got my numbers. I wanted to run them by the members here because there are a lot of ideas out there and maybe someone would say, “Yeah, in theory X% is correct but with my clients we find that Y% works much better.”
That I have but the calculation depends on the income and age today which my students don’t have which is why I made the assumption of average salary for your chosen career halfway between 25 and 65 i.e. age 45.
At retirement it all depends on expenses, but of course this is unknown at this point in their lives.
I think you should consider one reason a number like 80% is used rather than 100% or 125% is that the amount of saving required to achieve just 80% is seemingly staggering high yet it is achievable. While saving for 125% is also achievable, it would seem more unreasonable for a generation of young people that already sees the financial world stacked against them. The lower number gives them a target they can hit. So the lower number is used for motivation.
So using 80% in your case is reasonable. And it’s far less important than teaching them about compound growth and how both rates of return and duration of the investment are are vital to understand in order to hit that goal, be it 80% or 125%.
As a planning exercise, this is fine. For planning purposes, you can even use a range of numbers. See how much different the long term projections look when you do 70% (penurious retirement), 80% (hopefully comfortable enough retirement) or 100% (living the high life until you die). Good planners will be able to meet the first with money left over. Great planners might be able to sustain the second category. Almost everyone goes broke before they die if they try to live in the third group.
In the real world, you need to look at your best effort to estimate retirement expenses, which are all over the map. From what I can tell working as a volunteer with many retirees at all stages of retirement, the retirement expense curve for some looks something like this: early retirement - expenses are roughly the same as while working. Maybe you paid the house off before you retired or maybe it’s still not paid off. Either way, housing expenses are about the same. Commuting and working expenses are replaced with travel and entertainment expenses. Conspicuous consumption expenses (fancy new kitchen!) are replaced with preparing to be old expenses (build a ramp to the back door, put a new roof on with low-maintenance gutters, move the laundry facilities to the sleeping floor).
Middle retirement expenses start to drop. You are too sick and tired to travel or you just don’t want to anymore. The last car you bought is probably good enough to be the last car you ever buy. You are eyeballing rising expenses on a fixed income and going out to eat or to plays is just less enticing.
Late retirement, expenses ramp up again. Medical expenses are higher but worse yet, you are looking at things like 24 hour nursing care, intensive nursing facilities, or memory care units. Late retirement can last anywhere from a few months to 15 or so years.
None of this maps neatly to “you consistently need 80% of your working income.”
When budgeting for the long term, you need an inflation factor. I generally use 4% but your mileage may vary. Historically, health spending, which is a big part of expenses for the aging, have increased at faster than the general rate of inflation.
The 80% figure for retirement income is the one I’ve heard most often. But I think it also helps for the students to think about how much they need to save to get there. Fidelity Investments is the custodian for my employer’s 401(k) plan and their standard advice is to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67. I believe those numbers assume that your savings are invested, so you’re seeing the benefits of investment return.
One thing I wish had been discussed in HS back when I did this exercise is how to save for retirement. It’s one thing to calculate you need to have $X by the time you retire, but most HS kids won’t know how to achieve that. They may be thinking they just continually put money in a savings account and let it add up. They probably don’t understand things like a 401k, IRA, Roth, employer contributions, pensions, etc. It would be good to explain those things at a level they can understand. And give them info about how to decide which funds to invest in. Many people are flummoxed when trying to decide what funds to use for their 401k. They can’t make a decision, so they either don’t put anything into their 401k or they contribute to the 401k and leave the money in the default simple money market account (basically a savings account). Going over the mechanisms of how to save for retirement to maximize growth will help them reach their target because they’ll be able to make more informed decisions along the way.
That is part of the unit. This lesson specifically is: Can you rely on Social Security to provide for you in retirement? If not, how will you supplement? Honestly whether they are right or wrong, I want them to think about the question and how to use the tools as they work for the next 40 years and they have real numbers to work with. Hence the simulation doesn’t have to be (and can’t be) accurate, just reasonable.
As for how much to save in real life? I just want to get them to realize you HAVE to save something. It is a mental block with a lot of people that think retirement saving is a want not a need and thus it never gets done. Hell, if you go out and buy one ounce of silver every paycheck as your retirement plan, you are doing better than most people who don’t even do that.
That is the first lesson in the unit. Also to your point, oh everything online says I should max out my 401k so that’s my plan. But what if your company doesn’t offer a 401k plan? How does having a pension because you’re a railroad worker differ from using an IRA … and what’s the difference between a traditional and a Roth? I’m covering all of that.
That’s an earlier unit where I show them to do research deeper than, “I drink Coca-Cola so I’ll invest in KO.”
Agreed that that is the least useful bit for kids to learn:
Also why short term volatility is usually necessary to tolerate and does not equal “risk” over a long term. All about dollar cost averaging.
Personally I think an open discussion about the range out there from the FIRE movement to those who plan on working into their 70s. The variables can be ignored for the simple model discussion but recognition of how the variables change the available options, and that there are options, is good to introduced to early on I think.
