When clients first come in to start the retirement planning process, most have no idea if the money they’ve been socking away in their 401(k)s over the years will be enough to sustainably generate their income needs in retirement. In fact, usually all they focus on is building the pile up; very rarely do I run into someone who has actually worked backwards from income needs to the amount of money that they need to save.
The following excerpt from an article at MarketWatch.com addresses this exact issue. One of the themes the author builds on has to do with shifting your retirement planning focus to your future monthly income needs rather than an arbitrary savings target. With this little change of thought apparently comes greater peace of mind: in a survey the author quotes, roughly 84% of Americans said they would have more confidence and a better sense of control preparing for retirement if they knew how much future monthly income their savings would produce.
So the next time you open your 401(k) statement, don’t just check if the balance is up or down from the last reporting – keep the long-term goal of future income needs in mind and make plans accordingly.
When it comes to saving for retirement, most Americans would probably agree that more is better. This thinking often translates into how people engage with their retirement account: Log in. Admire balance. Log out.
The problem with this approach is that it doesn’t address the more fundamental questions millions of workers should be asking themselves when staring at their number: Will I have enough money to cover my monthly needs and expectations throughout retirement. And will it ever run out?
One of the best ways to answer this is for individuals to shift to a more positive frame of reference. For example, instead of worrying about “how much do I need to give up now” it may be a more effective to view saving for the future as “how much more will I be able to spend” in retirement?
Focus on future monthly income
Approximately 84% of working Americans said they would have more confidence and a better sense of control preparing for retirement if they knew how much future monthly income their savings would produce, according to the Voya Retire Ready Index.
Most people decide what they can and cannot afford based on a monthly budget. Why should planning for retirement be any different? Understanding how their nest egg — a large, lump sum — translates into future monthly retirement income provides individuals with the context they need to determine if they are on track or need to make adjustments.
For example, if someone is a little behind, simply increasing contributions to their workplace retirement plan might be the solution. If the gap is more substantial, breaking things down into how much they can afford to spend each month in retirement to cover their necessary and optional expenses may be less overwhelming.