Saving for retirement and your children’s future education are two of the most significant financial goals you’ll likely encounter in your lifetime. However, determining how much to save for each can be challenging and overwhelming. In this article, we will delve into the factors to consider when planning for retirement and your children’s education and provide guidance on ensuring your savings are on track to meet these goals.  

Retirement planning is crucial to ensure financial security in your later years. The amount you need to save for retirement depends on several factors, including your current age, desired retirement age, expected lifestyle in retirement, and life expectancy. While there is no one-size-fits-all answer, we will give you some general rules here that can help you get situated.  

To figure out how much you need to save for retirement, a good starting point is estimating what your expenses will be. This is not always easy to estimate, especially when you are years (if not decades) away from retiring. Some people think they will cut their expenses in half once they retire, although a 50% decrease rarely occurs (so do not plan on it). Other times, expenses may increase due to extensive traveling. We generally recommend not factoring in your full social security benefits into your planning as the program may change in the future. If you do, consider it as a pleasant surprise. But if you do not, at least you were ready for it.  

There are two approaches to estimate how much you need to save for retirement.  

By starting with pre-retirement income: as an example, let’s assume that you need 80% of your pre-retirement income to maintain your lifestyle in retirement. Based on that figure, you will need 10 times your pre-retirement salary saved, assuming you retire at age 67. Following this approach and to give you some points of reference, you should have saved at least:  

• 3x your salary by 40  
• 6x your salary by 50  
• 8x your salary by 60  

By starting with desired retirement income: the 4% rule stipulates that you can withdraw up to 4% of your retirement funds in the first year after retiring and remove that dollar amount, adjusted for inflation, every year after. Therefore, if you target a desired annual retirement income and divide it by 4%, then that is an indication of how much you need to save for retirement. That rule assumes a 5% real rate of return (real: after tax and inflation), no other retirement assets, and 30 years in retirement. If those assumptions change, then your savings amount will be adjusted accordingly.   

  

How to get there?  

Whether or not you have figured out your retirement number, consider the following good practices to be on track for retirement.  

1. Start early. Simple yet important rule. As invested money grows over time, the earlier you start saving and investing towards your retirement, the more time your money will have to grow. Even if you start small, you would be curious to see how a few hundred dollars saved in your twenties may turn out to be when you retire.                                                                                                  
2. Take advantage of your employer match. If your employer offers you a 401k (or 403b for nonprofit) plan, there is a good chance it also offers a matching contribution of up to 4%, 5%, 6% of your salary. If your gross salary is $100,000/year and your employer matches at 6%, then you should consider contributing at least 6% of your gross salary towards your 401k. Not only will your contribution of $6,000 be tax deferred but you will get an additional $6,000 from your employer’s matching. It is free money, so take it.                                                                                          
3. Set up automatic contributions. This is an easy yet effective way to stick to your saving plans. Choose your contribution amount, turn on the automatic option and let it be.                                     
4. Increase savings rate. Increase your savings rate today if you can. If you currently save 15% and can afford to save 20%, it may make sense to increase your savings rate. If that is not an option, try to increase it over time (such as increasing your savings rate by one point every year). It may not make such a significant difference today, but it can compound over time.                                                                                                                                                                          
5. Make catch-up contributions after 50. Once you turn 50, you can make catch-up contributions to both your 401k and IRA. For 2024, you can contribute an additional $7,500 on top of the $23,000 to your 401k. You can also contribute an additional $1,000 to your (Roth) IRA on top of the $7,000 limit.                                                                                                                                           
6. Contribute to (Mega) backdoor Roth. If you have maxed out your 401k contributions and want to contribute more into tax-advantaged accounts, you may explore whether you are eligible to contribute into a backdoor Roth or Mega backdoor Roth. Your money will grow tax-deferred in a Roth account, and any qualified distributions will be tax-free. Consult a financial advisor whether this strategy makes sense for your unique situation. For Mega backdoor Roth, you will also need to check whether your 401k plan at work provides this option.                                                                                                                                                                                                                                                                               
7. Have an investment strategy in place. Saving for your retirement is the first step and investment strategy is the next. Now you want to invest your savings to keep up with inflation over time and maintain the same purchasing power once you retire. When it comes to asset allocation, a rule of thumb is to hold a percentage of stocks equal to 100 minus their age. So, if you are 30, 70% of your portfolio should be equities. If you are 60, 40% of your portfolio should be. The remaining part should be so-called safe assets like high grade bonds or government bonds. However, beware of this rule as it was invented when life expectancy was lower and treasury bonds used to yield more than they have for the last decade. In today’s context, a “120 minus your age” rule might be more appropriate for your asset allocation. Now, this rule is just the beginning when it comes to building a portfolio. Once we get deeper into this, there are more to consider such as what equities, bonds to buy? When to buy or sell them? What about other asset classes? Because everyone’s situation is unique, there is no one size fits all. However, a financial advisor should be able to help you with your investment strategy. At Morling Financial Advisors, we help our clients in both financial planning and investment management. Please feel free to schedule a free consultation with us to go over your unique financial situation.                                                                                                                                                                                         
8. Rebalance your portfolio. Once you have an investment strategy in place, make sure you rebalance your portfolio when necessary. Assume you own two stocks X and Y at 50/50. If X doubles in value and Y remains the same, then X now represents 66.6% and Y 33.3%. You are now over exposed to X and underexposed to Y. By rebalancing your portfolio, you sell your “winners” and buy your “losers”, so your allocation is back at 50/50. Rebalancing your portfolio periodically is a good practice to reduce your risk exposure. If you manage your money yourself, consider setting up automatic rebalancing for two reasons: one, you will not have to remember to do it, and two, you will not make any emotionally driven decisions with your retirement savings (which may be detrimental to your portfolio). If you work with a financial advisor, they should be able to do this for you.  

 

Morling Financial Advisors, LLC (“MFA”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about MFA’s investment advisory services can be found in its Form ADV Part 2 and/or Form CRS, which is available upon request. 

The opinions expressed are those of MFA. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Material presented has been derived from sources considered to be reliable, but accuracy and completeness cannot be guaranteed. The investment strategy or strategies discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances.