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May 31, 2021

Two important keys to retirement security

Are you worried what retirement is going to look like? Wondering if you'll be better off than your parents?

Ratio If you’re over age 50 and concerned about the future, consider making two changes that could significantly improve your odds of retiring, says Charles Farrell, author of Your Money Ratios: 8 Simple Tools for Financial Security.

If you combine working a little longer with some modest reductions in your retirement lifestyle, you can vastly improve your retirement picture, he suggests. 

Working a few more years. First, consider how much of an impact working five more years could have on your retirement. Farrell assumes you’re 65 and have $1,000,000 in total retirement assets but cutting that number in half, excluding government pensions might be a more realistic target for many. Eiother way, the math is the same.

If you could earn 5% a year on those funds, your retirement plan would be worth about $1,275,000 at age 70, or about 28% more than at age 65, he calculates. That means it could support almost 28% more in distributions.

Plus, assuming you could save $15,000 a year for each of those extra years. The additional savings helps boost the plan balance to $1,360,000, or about 36% more than at age 65.

Cut back a little bit. If you can reduce your retirement lifestyle expectations by 15%, you’ll need a corresponding 15% less in savings to meet your goals. 

A good rule of thumb for producing distributions in retirement is that every $5,000 worth of distributions will require about $100,000 of assets at age 70. If you reduce your lifestyle needs by $15,000 that means you need $300,000 less in assets to support your retirement.

It really comes down to how important it is for you not to continue to work. If that 15% reduction provides you with the freedom to retire, it may well be worth it.

When you combine the 36% boost in retirement assets by working five more years with the 15% reduction in lifestyle expenses, you’ve got a swing of 50% in your retirement preparedness

That’s a huge change, and can make all the difference between an unrealistic goal and an achievable goal, Farrell maintains.

While earning more and spending less is hardly a revolutionary idea, is this how you expect your future to play out?

By Gordon Powers, MSN Money

* Follow Gordon on Twitter here.




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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...