Setting Retirement Savings Goals

Key Points – Setting Retirement Savings Goals

Your Desired Retirement Savings Amount Depends on Your Desired Retirement Lifestyle
Think of Your Financial Plan as a Spending Plan
What Are the Primary Expenses to Be Accounting for in Your Spending Plan?
Assessing Your Needs, Wants, and Wishes While Setting Your Retirement Savings Goals
19 minutes to read | 38 minutes to listen

We all have our own special goals that we’d like to achieve in retirement, but some of them are much easier to accomplish than others. Dean Barber and Bud Kasper discuss the importance of setting retirement savings goals sooner rather than later to attain clarity, confidence, and control in your retirement.

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How Do You Go About Setting Retirement Savings Goals?

Dean Barber: Thanks so much to those who join us on America’s Wealth Management Show. I’m your host, Dean Barber, along with Bud Kasper. The topic we really want to cover today is something that is on everyone’s mind when they’re in their mid-to-late 40s, early 50s. What do I need to have saved and how do I establish those retirement savings goals? How do I know that I’m saving the right amount to get to where I want to be?

We also recently delved into this topic in our article, How Much Should You Have in Retirement Savings by Age? I encourage you to read that article. To get answers to all these retirement savings goals questions, you need to step into the future and set some priorities, objectives, and a spending plan. There’s a lot of work to do before you can answer, “How much should I have saved by a certain age?”

If you want to have, say, $900,000 saved by 65, if you start saving $5,000 a year at 25, you should get there easily. If you use a safe withdrawal rate of 4%, that’s $36,000. Then, add some Social Security income and there’s your retirement.

Creating a Spending Plan

A lot of people think about it in such a simplistic manner. There are people who have nailed it to a pure number and know how much they need to be saving. They’ve already stepped into the future. They’ve brainstormed and created what that spending plan going to look like when they stop working.

Then they say, “Well, this is how much we have saved now. This is how much we need to save in addition to that. What are we going to do with everyone else? We’re going to spend it because there’s no guarantee that we’re going to be here tomorrow or the next day.” Rather than sacrificing everything for the future, they’re going to set a clear goal for the future. They’re going to fund that goal over time to live their lives how they want to.

So many people don’t have that clarity. Therefore, they don’t have confidence in where they are. That makes them feel somewhat out of control with their overall financial life.

The Many Variables of a Spending Plan

Bud Kasper: That’s correct. People need to approach retirement early because there are a lot of variables that can be targeted. Are you going to take Social Security at 62? Are you going to have a pension benefit?

I’ve talked with clients about working backward. Set an income goal and take taxes into consideration. Let’s ask the question, “How much money do I have to have in bucket A to meet that income need at a distribution rate of X?”

When we do that, it allows us to identify all income sources with that. I’m talking about Social Security. We need to integrate in Medicare and understand that Social Security can be taxable. We need to take this from a net perspective because Uncle Sam will always be in our pocket.

It’s our job as CERTIFIED FINANCIAL PLANNER™ professionals to work with our CPAs to mitigate as much tax out of the plan as possible. You spend the net, not the gross. Once we understand all the elements associated with where we’re going to source our income, we fine tune that plan to meet the objective of the client. Hopefully, they have the assets to support that. But most people don’t know. That’s our opportunity to show them where they stand.

Setting Retirement Savings Goals with a Purpose

Dean Barber: Right. What Bud is talking about are some tactics that we can utilize to help make sure what that spending plan is going to look like. I think the biggest part where people fail is they don’t establish that spending plan with clarity. In other words, they don’t think about, “How much am I going to spend each month? What do I really want to do?”

They’re so busy raising their children and building their careers that they’re just focused on saving money. They know at some point that they’re not going to want to work or they won’t be able to work, so they just blindly save. They’re maxing out the 401(k) or setting some money up in 529 plans. They’ve got Roth IRAs or brokerage accounts going. Or they might buy ETFs, mutual funds, or a stock here or there. There’s no rhyme or reason for it other than just save, save, save.

That’s where people can have some sacrifice. What I’d really like to do is talk about how we help people establish that future spending plan. That’s how they can get real clarity on setting retirement savings goals and how to do it safely. That’s the key. It’s what our Guided Retirement System is designed to do.

Setting Retirement Savings Goals Is Easier Said Than Done

We often meet with people who ask us, “How much can we afford to save?” They show us their budget and how much they currently have. They’ll let us know how much their mortgage payment is, how much their insurances cost, and what they typically spend on food, utilities, etc. Then, they’ll outline what they have leftover. That’s how much they think they can afford to save.

While you can commend people for living below their means and saving, those people may also be sacrificing today for a future that may not be there.

Discretionary Spending

Bud Kasper: That’s what I refer to as discretionary spending. We can all tend to overspend. We know what we need to have to maintain our lifestyles and paying for gasoline, housing—whatever the case may be.

It’s this discretionary spending that gets a little tricky from time to time. Dean has said before that so many people in retirement spend like they’re broke rather than what their capability is based upon sources of income and their savings account. When we use the Guided Retirement System, it identifies every source of income.

Dean Barber: It also shows you a safe amount to spend, but that’s jumping into the future again. Let’s back up and go to this whole idea that people can have a life today. They can have a discretionary spending budget today. They can still reach their future retirement goals.

The Clarity That Comes with a Financial Plan

Bud and I have both seen this over the years. I’m going to tell a story of a couple to help explain this. Just recently, the husband retired and joined his wife in business. We’ve been doing their financial planning over the last several years and trying to get them to that point of financial independence. He had a good job and good match to his 401(k). He was a mid-level manager, but he was also in his late 50s. His main goal was to spend more time with his wife.

His wife has a very small business that they operate out of the home. The plan he had was to help her and spend more time with her. The question he had was if he needed to make more income to do that. He wanted to know if he needed to keep saving so they could get to where they wanted to be when they both completely quit working.

Instead of them both working their separate jobs all the way to 65, we figured out that he could leave his job at 58. at his age of 58. Her business income would support them. They don’t need to save any more money to reach their retirement savings goals at 65.

Suddenly, they’re getting the best of both worlds. They’ve got the lifestyle that they want today. They’re getting to spend time with each other the way that they want to. What’s more, they know that they don’t need to continue trying to save a whole bunch of money to get to where they want to be when they both want to completely quit working at 65. That’s the clarity that I’m talking about. If you didn’t know that, you’d just keep working.

Seeing the Big Picture

There have been so many times where people think they haven’t saved enough and still believe they need to keep working. When we create this future spending plan for them to determine what they’re going to need to spend to have the lifestyle that they want, there are a lot of times where we’ve delivered the news to them that they can quit working tomorrow. We see it happen all the time.

Bud Kasper: It’s a beautiful thing when you see it in black and white via a formal plan. People can understand that the sources of savings that they have are going to serve the purpose that the couple needs during their retirement years. I’ve never been in a situation that I didn’t find that there was some area of improvement. There’s always some area where we can create a little bit more net spending. People end up missing some of the abilities that they have to generate a little bit more income or reduce taxes so they have more net spendable income.

Again, that’s why the Guided Retirement System was created. It gives you a visual to understand all the sources that people have created for themselves. We run the test to see if those sources produce the income that you need.

Dean Barber: That’s right. Bud stepped into the future again, which is important, but I want to cover this in more detail for people that are still working and trying to achieve financial independence. How do those people go about setting retirement savings goals? How do they know how much they need to be saving?

Setting Retirement Savings Goals Is Like Putting Together a Puzzle

Let’s say someone is in their early to mid 50s. The only way that they know how much they need to be saving is to first know how much they have today. They need go to the resources that Bud mentioned and talk about what they want their future to look like. I’ve used this analogy probably 100 times or more on America’s Wealth Management Show about putting together a jigsaw puzzle. What is the most important piece? Where do you start with that jigsaw puzzle?

Bud Kasper: The picture on the box.

Dean Barber: Exactly. Unless you know what the jigsaw puzzle is going to look like at the end, you have no idea where the pieces are going to go. The first thing we need to do is get clarity on what that future is. What is your picture of your ideal retirement? Once we understand what that picture of your ideal retirement is, then we start assigning numbers to it.

Don’t Make General Assumptions When Setting Retirement Savings Goals

What I see happen so often is the opposite of this when some people visit with one of our CERTIFIED FINANCIAL PLANNER™ professionals. They’ll go through the process and have a plan, but it’s totally wrong. The problem is that they will have often assumed that they need to plan on spending 80% of what they’re taking home today. Many people think that method should give you a pretty good retirement.

First, how much are you taking home today? Let’s use an example and say that someone is taking home $7,000 a month net of taxes. So, multiply that by 80% and that will be their spending goal in retirement. You can plug in some numbers and find out in five minutes that you have some crazy answer that’s not even close to right.

There’s No Easy Button for This Process

It reminds me of that old ING commercial where people were carrying around a briefcase with a number inside of it. Suddenly, this is your magical number without any regard to taxes or what they want their lifestyle to be like. I even went online and did that crazy thing. It literally took me less than three minutes for me to get some BS number of where it said I needed to be at a certain point. I’ve been in this industry for 35 years, so I knew it was BS.

The problem is that most people want that easy button. They want a simple answer for how much they need to be saving.

Bud Kasper: The last thing that you want is to suddenly find yourself at retirement age and realize that you didn’t save enough. You don’t want to find out that you need to work for another year or two.

If we can understand what the objective is early on, then we can make a plan. We’ll then do course corrections when necessary to save the amount that they know they need to have when we apply the financial planning statistics of inflation, taxes, etc.

Dean Barber: Bud, what is a sadder situation? Somebody that didn’t save enough and maybe had a little bit less of a lifestyle that they wanted in retirement or somebody that saved way too much and sacrificed all along the way and then dies two years into retirement?

Bud Kasper: Well, obviously ladder is not what I would want.

Dean Barber: Unfortunately, we see that more often than the person that hasn’t saved enough, though.

Bud Kasper: It’s an unknown. We know that, but you’re right. It’s another planning element that needs to be taken into consideration.

There Are No Stupid Questions When It Comes to Determining Your Retirement Savings Goals

Dean Barber: There are a lot of things to think about when setting retirement savings goals. When you retire, how often do you and your spouse plan to travel? What types of trips do you plan to take? Do you think that your children are all going to live in the same city that you are? Will some relocate somewhere else? Are all your children planning on having grandchildren? Will you be traveling, or be paying for them to go on vacations?

You need to start thinking like you’re in that time. While you don’t know what those answers are, you need to come up with some idea of what you want that to look like. The only way that you can figure out how much money you need to have in the future to eventually get your any to “How much do I need to have saved today?” is to create that future in the Guided Retirement System.

You can then say, “Here’s the future and income I want and the sources I’ll need.” Now, here’s your number. This is how much you need to save. This is how you need to invest to give yourself the highest probability of success in achieving that. Folks, this isn’t simple. Any of you that are trying to make it simple, you’re going to wind up making mistakes. I promise you. I’ve seen it so many times.

The Needs, Wants, and Wishes

Bud Kasper: There are three elements in the creation of a plan—needs, wants, and wishes. Needs is the first element. What do we need to be able to maintain our lifestyle? How much do we need to save? Is that the right amount? Is it too much or too little? You should start planning early so you can monitor that.

The wants are the things that you deserve to have for yourself: a vacation, maybe two vacations. The wishes are something that maybe a little bit further out there, but the plan and the circumstances that surround your plan will give you those answers as well.

For example, let’s say I’m going to take my entire family on a trip. I have five children, so that would cost me a fortune. To make the trip happen, I would likely ask my kids to pay a certain amount and my wife and I would cover the rest.

That’s how needs, wants, and wishes work within a plan. It’s a serious thing. It has a real meaning to what the financial plan needs to accomplish.

Your Needs Are Basic Living Expenses

Dean Barber: Right. When you boil it down to needs, wants, and wishes, it might help people think in a different way. Your needs are your basic living expenses. You need to pay homeowner’s insurance, property taxes, or your mortgage if you have one. You need to pay your utilities. Then, you need money for food, clothing, and gas. Those are basic needs.

However, nobody wants to retire and only be able to cover their basic needs. Then, you’re just sitting on your couch and saying to your spouse that you wish you could go somewhere. But those basic needs obviously come first.

The basic needs that you have in your 40s or 50s may be different than the basic needs that you have in retirement. It depends upon what you want that retirement lifestyle to look like. That’s the first step. Identify what kind of financial support you need to cover your basic needs.

What Do You Want to Do in Retirement?

Then, you start talking about what else would you like to do. What do you want to do during retirement? This is the fun part. Maybe you would like to take at least one nice vacation a year. You might want to do what I’m doing right now and spend some time in Florida during the cold winter months.

Everybody has their own set of wants. Those wants can include wanting to replace your vehicle every five years. If you like new cars, make sure to put that in your budget. I want to fund my grandkids’ college educations. That’s going to be very, very important to me. The list could go on and on.

The point is that everybody has different wants. Basic needs for most people, though, are the same. It just depends on how luxurious that lifestyle is, what your situation is, and what those basic needs are going to cost. The wants and wishes are the things that you dream of doing.

Putting the Wishes into a Plan

I have a great story about a client of mine who is now 58, so I consider him to still be a young man. He and I started working together about eight years ago when he came in with the very same question that we’re talking about. He asked how much he needed to be saving too make sure that by the time he was 60 that he would have the freedom to walk away from my job.

We then went through this exercise of what Bud and I are talking about. We needed to determine his needs, wants, and wishes. What was the ideal retirement lifestyle going to look like for him? I always tell people to not give me a basic number. Give me your dream retirement. What do you really want to have happen? Then, if we need to start cutting things back from that, we can prioritize.

My client and I started looking at the numbers for him, and it was so simple while looking at his situation. I told him he had reached financial independence. He needed to dream bigger.

The Wish Came True

He was surprised by that and asked what number I thought he could get to. I centered in on a larger number and asked him what he would do with that total. He said it would give him and his wife and I the ability to have the winter home in Arizona that they’ve always wanted. So, we put that into the plan. That was their wish. It was one of those things that he had no idea was possible.

Do you know what happened? He’s 58 and he’s already done it all. He’s done everything that he wanted because he took the time at 50 to get granular with this. That’s what really people need to do. It’s work, but it’s work that’s going to give you that clarity, confidence, and control in your financial future that you’re looking for.

Bud Kasper: Absolutely. You took the words out of my mouth from that perspective. We used to have a phrase that was created almost 20 years ago called, “the millionaire next door.” When you’re saving for retirement, you need to understand where your savings are.

Does It Matter Where Your Retirement Savings Are?

Everybody plows money into their 401(k) plan. You need realize that you have an unwanted partner in that plan named Uncle Sam. I’m talking about taxes. So, what should I be doing other than my 401(k) contributions?

Well, let’s see how much more discretionary money you have. Where is the best place to save that? When you retire and start to source out that income, you have money that you’ve already paid tax on in one bucket and another bucket that you have tax deferral on, such as an IRA. That allows the CFP® professional to source these out in a way that we manage the tax liability associated with income creation.

I don’t know any other way of doing this or projecting it into the future without working with CERTIFIED FINANCIAL PLANNER™ professionals like the ones we have at our firm.

Getting the CPAs Involved

Dean Barber: You also need a CPA sitting alongside that CFP® professional. While there is a tax component to the CFP® professional certificate, the CPA is the true subject matter expert in that area. I think it’s critical to have them together working with the client.

Again, it’s going to be difficult to come up with that number unless we’ve created that spending plan for the future. But Bud brings up an excellent point. Once we identify that number that you need to save, we need to get the CPAs involved.

They will help determine whether to save into a Roth or traditional 401(k), taxable account, tax-deferred in some sort of annuity, tax-free account in municipal bonds, or dividend paying stocks. Does that matter? Does the tax bucket that I’m saving into matter? Will that affect how much I should be saving?

We know that where you’re putting that money today will ultimately impact the tax liability coming out on the other end. Bud said that need to know the net number that you want to spend. I’m glad Bud brought that up because I think identifying that net number is a critical component to the plan. How do we get you to that net number and save the least amount possible to get there? We’ll want to pay as a little in taxes and take as little risk as possible all along the way. That’s where you get that clarity, confidence, and control.

Alleviating the Fear of Running Out of Money

Bud Kasper: Absolutely. What’s the greatest fear a person has? It’s running out of money. You better find out beforehand whether you will run out of money when you’re ready to retire.

Dean Barber: You don’t want to do that. That’s not a scenario that anybody wants to find themselves in. You don’t want to be relying on your children or government entities for support. To avoid doing that, we’d love for you to start a conversation started with us. You can get also get a copy of our Retirement Plan Checklist and watch our Retiring with $1 Million video.

Bud, how many times have you had somebody first meet with you and say that they came in too soon?

Bud Kasper: Never.

Dean Barber: What people normally say is, “I should have been here five years ago.” But again, you don’t know what you don’t know. That’s why we like to do a complimentary consultation so that you can have a better understanding of how we can help.

Setting Retirement Savings Goals in the Retirement Red Zone

I want to shift gears a little bit to discuss setting retirement savings goals for people who are planning to retire within the next five years or so. Bud and I refer to this period as the retirement red zone. It’s kind of that final phase of getting close to retirement. The rules start to change and then they completely change by the time you retire. The things you do in those last few years leading up to retirement can have a huge determining factor on the success or failure of your overall retirement.

There are no secrets when it comes to the fact that interest rates are going to rise. Inflation is here. We don’t know how bad it’s going to be or how long it’s going to be here. We also know that our markets are overvalued. Most markets entered correction territory for a brief period before bouncing back.

What does the future hold for markets? What should a person that’s nearing retirement be doing with their money? Should they be getting more conservative? Or should they just stick it out and use that long-term buy-and-hold approach like Wall Street wants everybody to do?

Financial Planning Needs to Be Dynamic

Bud Kasper: You need to make adjustments in your portfolio. The other thing is that it’s better to over save than under save. If we know that earlier on, it gives us the opportunity to create a target that overshoots, what we might need from an income source.

The retirement red zone is when you’re in the final years up to retirement. It’s a time when you need to start nailing things down to make sure that you have the security built into the plan that you want to have.

Remember that markets are always going to be volatile. We most certainly have experienced that lately, but even that can be defined by history. Once we can find out what the person’s risk tolerance is and if it matches into the plan, we can determine how much income you need to remain successful for your entire life. That plan becomes truly meaningful to that couple as they’re preparing for retirement.

Don’t Fumble in the Retirement Red Zone

Dean Barber: I recently had the opportunity to meet with a couple who was referred to me by a long-time client just before the end of last year. This couple has done a really good job of saving. They are kind of like the person I was talking about earlier in that they didn’t forecast what their future needed to look like and how much they should be saving. They just saved and saved and saved.

Unfortunately, everything they saved was in their 401(k) from the time that they started working. They started working for the same company at 21 and are now in their late 50s and early 60s. They’ve been saving into their 401(k) for a long time and all their money that they have saved is in there. They have spent everything else and enjoyed their lives, which is what I encourage people to do.

When I met with the couple, they asked me if they were there yet. They showed me how much they want to spend in retirement. They knew what they want their retirement lifestyle to look like, but weren’t sure if they had saved enough to live it out. We went through our Guided Retirement System, put everything together, and lo and behold, they’re there. They can retire in 2022.

The problem was that inside their 401(k), they had 100% of their money in the S&P 500 Index Fund. I said, “You’re there. You’ve almost won the game. But what can happen here is that you fumble the ball and the other team takes it back for a touchdown and you wind up losing.”

Keeping Your Money Safe

What I mean by that is if the market were to not do too well and lose 10% or 15%, the whole landscape of what they’re trying to do in retirement becomes totally different. God forbid we have a 20% or 30% bear market during the next the couple of years. That would absolutely destroy their ability to have the retirement they want.

So, I immediately broke things down for them. Since they knew how much they wanted to spend, I told them to set that aside in their 401(k). We put that in that stable value fund, so they know they have three years’ worth of their initial spending sitting in something very safe. Then, we took the rest and created a 60/40 allocation. They won’t be touching whatever they have in equities for at least another five to seven years.

That gave them confidence. They realize now that they don’t need to depend on what they initially had. They can protect some of it and try to grow at a reasonable rate moving forward so that they don’t run out of money.

Tax Diversification Is Key

Bud Kasper: Right. Let’s go back to our red zone football analogy. If you look at the people that were preparing to retire during The Great Recession back in 2008, they suddenly found themselves out of field goal range as well. They lost 38.5%. That’s a severe setback.

If you have that kind of loss in retirement and you’re spending, you’re compounding the problem. Therefore, you need to look through this and have an understanding. Now, I have a question for Dean. Had the couple that you were just talking about shifted any money into the Roth side of the 401(k) they were investing in?

Dean Barber: No. 100% in just the normal tax deferred 401(k). There was no tax diversification.

Bud Kasper: That’s a missed opportunity.

We’re Happy to Help with Setting Your Retirement Savings Goals

Dean Barber: It was. Had we been working with them 10 years prior, we could have started to shift some over into the Roth, done some conversions inside the 401(k), or directed some of the contributions there. It would’ve drastically changed the landscape. The point is that most people out there could benefit from a conversation with one of our CERTIFIED FINANCIAL PLANNER™ professionals and using the Guided Retirement System.

The great thing is that we have no financial products to sell you. We’re not salespeople. Our CERTIFIED FINANCIAL PLANNER™ professionals are salaried employees, so they’re there to act in your best interest. They’re there to help you figure out what it is that you need to have clarity, confidence, and control in your retirement plan.

As you work on setting your retirement savings goals, get a 20-minute ask anything session or schedule a complimentary consultation CERTIFIED FINANCIAL PLANNER™ professional. Also, don’t forget to pick up a copy of our Retirement Plan Checklist, our article on How Much Should You Have in Retirement Savings by Age?, and our Retiring with $1 Million video.

We appreciate everybody for joining on America’s Wealth Management Show. Everybody stay healthy, stay safe. We’ll be back with you next week same time, same place.

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