I recently wrote about the importance of avoiding market risks as you get within ten years of retirement, to give you time to recapture any losses before you turn on the income stream. While that is very important, there is still much more to calculating how much you will have in retirement than just this. Recently, a client told me they had achieved a 17 percent return over the last two years in their 401(k) account. He was very excited. I asked him to go back to 2008 and examine his growth rate since then. He said he was far ahead and doing very well, and that he was getting a 12 percent growth rate, higher than anyone else. His answer seemed very questionable to me, so together we examined the numbers and discovered that my client had forgotten to withdraw his own monthly deposits and employer’s match, which skewed his actual rate of return to look higher than it was. When we adjusted for this error, he wasn’t even getting the same level of money as he was in 2008, before the market bombed.
Which makes a huge point:
- How many people know how to properly calculate rate of return on their 401(k) or IRA?
- How many people know how to forecast the amount of money they will have in their retirement account at age 65?
- How would a person go about determining how long this money will last during retirement?
Since this knowledge is critical to your financial future, I suggest you learn how to accurately calculate these numbers or contact a professional who can prepare these numbers for you.
May I add some insight that will help you?
First, predetermine what your spending level will be at retirement. This mean you need to pick an age. Then build a spending plan as if you were retired.
Second, determine what level of income you will need to live comfortably. Now work backwards to today. If the number you need today is more than what you will have, then what do you do? The obvious answers are:
- Work longer hours today, or
- Work more years, or
- Spend less by cutting some of these expenses you have listed.
As you make these decisions now you will have a much calmer heart as you approach retirement. One future problem to address is how long will you live in retirement? I will return with more suggestions.