This is one of the fundamental questions of finance, yet often goes unanswered by many financial advisors and most individuals. It is the most common question I get asked at Investor Junkie. It’s critical to know if you are on the right path towards retirement.
The earlier in life knowing the answer to this question the better. If you are a Millennial, you have time on your side. If you are a 54-year-old Baby Boomer, you still have time to catch up but have to save at a much more accelerated pace.
Are You Saving Enough?
It’s been reported that two-thirds of Americans can’t come up with $1,000 in an emergency situation. So part of the issue is individuals aren’t saving enough towards basic goals. Forget about loftier goals that are 20, 30 or 40 years away.
Even the highest income people (households making more than $100,00/year) — 38 percent say they would have at least some difficulty coming up with $1,000. High income clearly doesn’t mean you are saving and investing, but many are still spending most of what they earn.
So if someone can’t come up with $1,000 for an emergency, you know things are worse for retirement planning.
From Federal Reserve statistics, the average savings rate in the United States for the past twenty years has been around 5%. That clearly isn’t enough a comfortable retirement. By most estimates, it should be at least double that amount, if not ideally triple.
A simple back of the napkin formula is for every $100,000 you have saved you can generate approximately $4,000 a year in retirement income. That doesn’t seem like a lot that’s because it takes into account stock market fluctuations and keeping in mind your savings has to last a long time.
Individuals are living longer than ever, and it’s not uncommon for someone to live 20 and maybe even 30 years past their 65th birthday. Saving 5% or less a year for 20-30 years before retirement typically isn’t going to last 20-30 years when retired.
So most people are planning to fail by failing to plan.
Like weight loss, or growing a business, the answer to retirement planning is not known unless it is measured. Take the unknown and make it known by planning it out.
Using Technology to Help
At Investor Junkie we’ve reviewed hundreds of financial services. FinTech, as this growing space has been called, is helping take the mystery out of investing and personal finance. FinTech has been making many investments and tools available where it was only available for financial professionals or the elite few.
One such service is Personal Capital.
Personal Capital is a free tool that allows you aggregate all of your financial accounts into one consolidated place. Via Personal Capital you can monitor your net worth, budget, and find out your 401(k) expenses.
More importantly, Personal Capital has Retirement Planner tool to answer the fundamental question “Do you have enough money to retire?”
From my review of Personal Capital, I’ve found it’s one of best the tools out there for this purpose – free or paid. Once you link your financial accounts, Personal Capital does most of the legwork for you. It will take all of your accounts and create a future projection of your finances.
With previous personal finance software, like Quicken, you had to do a lot of manual legwork to figure out your retirement picture.
Personal Capital figures out the possibility of you achieving your retirement goal by what’s called a Monte Carlo simulation. It takes all the possible returns from historical stock market data and then determines the possible future outcomes.
All you have to do is enter your retirement income goal, and Personal Capital works backward from that. The service allows you to play with many “what if” scenarios to know exactly if you are on track or not.
The tool can not only help with retirement planning but also the major life expenses such as buying a house, having a baby, or saving for college. With personal finance software out today like Personal Capital, there’s no reason you shouldn’t know if you are on track towards retirement goal.
