Einstein once said called compound interest the eighth wonder of the world. As a result, the oldest financial planning tip in the world is that the sooner someone starts saving, the better their retirement is likely to be.
With the benefit of time, investments are more likely to experience the effect of compound growth or compound interest, and with the benefit of time investors can utilize a potentially more growth-oriented, longer-term investment strategy, which may result in higher returns over time.
So yes, small amounts of money invested early in life can create powerful results over time. But in the real world, life happens, and sometimes even the most fundamental advice is not able to be acted upon.
Which is one reason why a recent CNBC column quoted a survey by GoBankingRates that found the mean retirement savings for couples in their late 50s was only about $163,000.
Is this enough? The question is impossible to answer in a column, but using my planners intuition I have to answer: maybe.
If this hypothetical average couple (let’s say both spouses are 58) is close to having the house paid off, their kids are independent and at least one of the spouses is committed to working until the Social Security full-retirement age of 66, as a planner we might be able to pull this retirement off.
If our couple is able to buckle down after the house is paid off, maxing out their retirement plan contributions while receiving an employer match, and if their $163,000 retirement nest egg is properly invested, I believe they could reasonably acheive $400,000 to $500,000 by age 66.
Using the basic 4 percent distribution rule, assets at this level could generate $20,000 a year in income (and can probably rise over time). According to Social Security, the average full retirement benefit of the higher-earning spouse is $32,000 a year, and the second spouse is likely to receive roughly at least $16,000 in Social Security.
The result of these income sources is about $5,600 a month in pre-tax retirement income, which with the tax efficiency of Social Security and depending on the type of accounts used for retirement funding, would be about $5,100 after tax.
In Northwest Indiana, this monthly income level, along with a paid off mortgage, can probably make ends meet, and maybe even include a little comfort and leisure.
The point of this simple thought exercise is that retirement is a highly variable, and highly personal financial pursuit. Any TV commercials or headlines selling certain retirement numbers or utilizing the word “crisis” are not contributing to anyone’s solution.
The size of a family’s savings and retirement portfolios is obviously important, but family debt levels, mortgage balances and lifestyle expectations are also vital parts of the retirement equation.
Beyond this, variables such as the independence level of adult children, availability of employer pensions, state of health and the possibility of future inheritances all add to the puzzle.
I sincerely believe one of the most powerful ways to increase the chances for a successful retirement is to engage an experienced professional to help coach you toward this goal. The typical family may only retire once, but an experienced financial advisor experiences dozens of retirements per year through his or her clients.
