Planning for retirement is just like any other kind of budgeting you have to do for your business--it requires pinning down some numbers. But to figure out the right amount to save for your goals, you'll have to ask yourself several layers of questions.
That's how Energy Hippo co-founder and CEO Nitin Manchanda, 48, has approached his long-term planning. His firm, which is based in Alameda, California, develops software for companies to monitor and save on their energy costs. When Manchanda started the business, he called on an old friend from Mumbai, Ajay Kaisth, a fee-only certified financial planner with KAI Advisors in Princeton Junction, New Jersey, who specializes in working with small-business owners.
The sort of big-picture planning Kaisth recommends involves looking beyond the traditional benchmark of saving 25 times the expenses, minus Social Security and pensions, you'll have in your first year of retirement. That's a good place to start, but you should also ask yourself the following questions.
Are you a saver or a spender?
Be honest: Do you have the discipline to save on your own? Or are you a spender?
Manchanda says he has always made savings a priority and has "always maxed out my 401(k)s," adding that "I come from a humble background. We bought our first house only five years ago, and we have avoided getting into debt. We've saved as much as we could and spent only $2,000 on our wedding." Still, he sought help with the big picture. And while he "had some friction" with Kaisth on figuring out his retirement age, he pushed it up once he saw a projection of his savings.
How much will your goals cost?
How much you spend now and how much you want to spend in retirement will change your savings level. Can you cut costs now to save 10 to 20 percent of your income? That will make a big long-term difference.
Kaisth had Manchanda and his wife, Catharina, complete a questionnaire on total assets, income, health care costs, preferred retirement age, and other savings goals. The couple prioritized 10 to 12 savings "needs" and "wants," including retirement; out-of-pocket health care expenses; four years of college for their 12-year-old twins; travel; home improvements and maintenance; wedding gifts for their children; and vehicle purchases for each spouse every seven to eight years. Kaisth then ran a projection assuming Manchanda retires at age 65 and lives until 90. He concluded that the couple needs to accumulate $3.1 million in savings to cover their expenses during retirement.
Yes, that's a big number. When you consider health care and living expenses, it often will be a big number. But there's room for adjustment depending on what your priorities are--and they may change over time.
So how do you measure progress?
First, don't neglect regular financial checkups. Kaisth has software that constantly monitors the probability of his clients' success given dozens of variables, including contribution levels, rate of return, and projected retirement age.
Being flexible is also important, as Manchanda has learned. He's changed his planned retirement age from 60 to 65, to meet his financial goals. "I'm realistic on my chances of success," he says. "My savings were on track last year. This year, we'll see."
So take your time to fully answer these questions. You'll be rewarded with a healthy head start on retirement and the flexibility to shift direction if your needs change.