One Smart Thing You Can Do for Your Retirement Today


Retirement planning sounds like a daunting and confusing task. But there's one practical and surprisingly simple step you can take today to greatly improve your retirement preparedness — run some numbers to estimate how much money you'll probably need. You'll be happy to see how quickly you can do this, and how beneficial it will be.

A Quick Calculation

It's never been easier to estimate your retirement needs, with numerous free online calculators readily available. One of the simplest is Fidelity's myPlan Snapshot. You just need to enter five bits of information (your age, income, how much you have saved so far, the monthly amount you're now contributing to a retirement plan, and your investment style). Then it will give you a quick read on how much you may need to have in your nest egg by the time you retire, and how much you should be setting aside each month right now in a 401K plan or IRA.

For example, according to the calculator, a 25-year-old who makes $50,000 per year, has $15,000 saved so far, contributes $300 per month to their retirement plan, and invests aggressively, will need to have about $2.8 million saved by the time they're 65. If the market performs poorly, the calculator says they'll end up with about $880,000 at age 65; if it performs on average, they'll end up with about $2.3 million.

The calculator enables you to easily change various inputs to see what you could do to get more on track. For example, what if they changed their investment style to "most aggressive" (100% stock-based investments), changed the amount they save each month to $500, and moved their assumed retirement age to 67? Now the calculator says if the market performs poorly, they'll end up with about $1.5 million. If it performs on average, they'll end up with a portfolio totaling nearly $4.8 million.

After running the quick calculation, Fidelity gives you the option to run a more detailed analysis by clicking "Create a Plan."

An Unpopular, Yet Helpful Chore

Despite how easy it is to run the numbers on retirement, relatively few people have done so. According to the Employee Benefit Research Institute, just 48% of all current workers have calculated their needs. Among workers age 25-34 — those who have the most time to take advantage of compound interest — just 38% have run some numbers.

Those that have calculated their needs report higher savings goals than those that haven't and greater confidence in their ability to one day retire comfortably. Apparently, crunching the numbers on retirement motivates people to act on what they learn.

From Insight to Action

Of course, that's what makes a needs assessment beneficial — taking action on what you learn by making any needed changes to the amount you're setting aside for retirement each month.

Don't be discouraged if there's a large gap between how much the calculator says you need to save and the amount you're now saving. Just do what you can to start narrowing that gap. Using a budget is one of the best ways to free up monthly cash flow that could be put toward increased retirement savings. Another is committing in advance to use at least a portion of any future pay increases to boost retirement savings.

It's a good idea to run a new retirement needs assessment once a year. Circumstances change. Running new numbers annually — and making any needed adjustments to how much you're saving for retirement — will help make sure your retirement plan stays on track.

Have you taken this step? Have you put a plan in place to begin acting on your insight?

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