Part of my job as a financial wellness consultant is to help people from all different walks of life and in different stages of their lives get to a point where they have fully funded their retirement goals. How do we get there you might ask? For that we must take a few steps back and define what fully funded means and explore what contributes to being fully funded.
To have a fully funded retirement, there is not one general number that all people are striving for, it’s more of an equation. The amount is independent and specific to your own set of circumstances. The number must accumulate to a sum that will sustain an income stream for the expected life of the person or people that will be drawing the income. The individual must be comfortable with his/her lifestyle, what they can and cannot purchase, given that set income, because, at some point, the individual will not have the capability to add to that pot of money, and they will be drawing from the value. So to define what a fully funded retirement would look like we often refer to it as the number of assets that are needed with consideration to any known income sources now and into the future as well as any known deductions now and in the future. I have made the analogy before of this situation being similar to a child’s sandbox or beach toy. The child will use a shovel to put sand into a funnel and that sand will slowly leak from the bottom of the funnel, although all funnels are not the same size, and spin some sort of amusing dial or widget that the child finds entertaining. The child can work hard and fill the funnel with bigger shovels or multiple shovels; s/he can even have friends help fill it. Eventually, the child is going to get tired and not want to shovel any more. From then on, the sand will just be filtering out the bottom of the funnel to spin the widget. In this example, the funnel would be retirement or other savings accounts that are accumulating, and the sand that the child is working so hard to fill the funnel with is the money that is able to be saved. When we talk about a fully funded retirement, we are making sure that the funnel is full enough to not run out of sand before we are done playing.
The first time I meet with financial wellness clients, one of the initial questions I hear is how much money will I need to retire. I will answer that question with two questions: “How much of your current income do you need to maintain your current way of life?” and “How much of your current income are you contributing in retirement, savings or other types of accounts?” The quantity a person or family spends has a tremendous impact on the final number that we must shoot for to become fully funded for two different reasons. How much someone is spending will determine how much money that s/he can contribute to his/her savings (the sand filling the funnel), and it will also give an indication as to how much money s/he will need from his/her savings in retirement (how much sand flows out the bottom of the funnel). If we can really fine-tune those areas of this equation, we are in a much more manageable position.
Another thing that we can do to try and prepare ourselves would be to add positions in our holdings that passively add income to our accounts (friends helping to shovel in sand). These types of positions can range from dividend-producing stocks, bonds or funds to owning a percentage in other businesses or rental income. The idea is that these holdings will continue to work for us even when we aren’t doing any of the physical work and, therefore, they are passive. What happens, in my experience, when we do not account for all these components, is that people try and reach for returns that are more aggressive or speculative than they can really handle and become overly stressed by the turbulent performance.
Performance, fees and tax efficiency are all important components to this equation as well, but, from what we have seen in the industry, if you do average or better in each of those topics, then your outcomes will be beneficial. When you consider how much money you are saving while you’re working and how much money you will be spending in retirement, you need to be doing something more than average. Multiple sources will tell you that you need to be saving 12-15% of your current income in order to accumulate enough retirement assets, while the average American is saving under 5%. Similar types of statistics are available for the amount of money that Americans are currently spending: 60% of Americans spend more than they currently make, compared to how much we should be spending, which is less than 80%. We can all obtain these goals.
More people are becoming aware and rethinking the way they save money every day. It does not happen overnight. Just like any other behavioral changes we make, it’s all about small daily, weekly or monthly changes that compound over time. You can do it!