The Retirement Equation: It’s Not Just the Size of Your Nest Egg

Written by , July 24, 2014

The Retirement Equation: It’s Not Just the Size of Your Nest EggAs thousands of baby boomers enter retirement each day, the topic of retirement savings is a popular one in the mainstream press and on the Internet. Almost invariably, a large percentage of the articles and discussions about retirement will focus on how much an individual or couple will need to save in order to live comfortably when they stop working.

But the size of a retiree’s nest egg is only part of the retirement equation. The other side of the equation that current and future retirees should be paying attention to is expenses. After all, it can be difficult to plan your retirement savings strategy if you don’t know how much to save.

Here is some retirement advice on other factors you need to consider as well.

  • How Are You Investing Your Retirement Funds? Not all nest eggs are created equal. Consider, for example, two portfolios that are each worth $100,000. The first is invested entirely in short term bank CDs, while the second is invested in a mix of mutual funds. The first nest egg is certainly “safer” than the second in terms of the chance you might lose your principal investment.
    • But over the course of many years (or several decades), those two portfolios are not likely to perform similarly. Even with the higher investment risk, chances are quite good that the second portfolio comprised of mutual funds will grow significantly larger than the “safe” portfolio of bank CDs.
  • What Will Your Retirement Lifestyle Be? As noted above, people like to focus on accumulating a certain amount within their retirement savings accounts. For example, many have the goal of saving up $1 million by the time they retire. That amount (or virtually any other amount) might or might not be enough, depending on the type of lifestyle the retiree is hoping to support with their nest egg.
    • Before retiring, consider your future expenses in two categories; those you have a fair degree of control over, and those over which you have relatively little control. For example, your housing and entertainment expenses are somewhat within your control, but your medical expenses may be less so. Evaluating your likely retirement lifestyle, and using that information to determine how much you need to save, is very important.
  • When Will You Retire? Another important part of the retirement equation is when you plan to retire, and a couple factors come into play here. Not only will a later retirement date mean that you’ll have more years in which you’ll be in the workforce (which means you’ll be able to save more). It also means that you’ll be withdrawing funds from your nest egg for fewer years. Retiring later means that you can begin taking your social security benefits later, which will result in a higher monthly payout.
  • By thinking of retirement in more than just terms of the target savings number, you’ll put yourself in the best possible position to be adequately prepared.

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