Retirement seems like a long way off, when you're still stepping on toys and washing spit-up out of the shoulder of your favorite T-shirt. That's a good thing: the longer you have to save and invest, the more likely it is that you'll reach your retirement goals. Setting a realistic goal is one of the keys to success. It starts with determining how much money you'll need to save for a comfortable living, then making an investment plan to get you there.
One thing to bear in mind is that you'll be living well just before you retire. Your kids should be grown and gone, your house paid for and your income at a lifetime high. So, how much of that will you want to give up when you retire? Chances are, the answer is "As little as possible." That means you'll probably need more than you realize, in order to retire comfortably. For example, if you retired with $1.5 million in your 401(k), that would yield a safe income in the range of $60,000 annually. That's not a lavish income.
There are a number of calculators available online to help you work out how much you'll need to save in your retirement accounts, in order to have the lifestyle you want. The best take into taxes into account, and let you "what-if" a wide variety of investment strategies. It's a good rule to allow more money than you think you'll need, and assume lower returns than you think you'll get. That way if you've miscalculated, you'll have more money than you need instead of less. It's a good problem to have.
You'll need to do some research to use these calculators effectively. They start with your current age and planned retirement age. This establishes how long your investments can grow, and how long they'll need to support your lifestyle after you retire. Then they factor in your current income and assets, your existing retirement savings, and how much you're currently contributing. Most will also ask for your expected levels of Social Security, and the returns you're getting from your investments -- that's where the research comes in. The more detail the calculator asks for, the better the results will be.
This planning process is a valuable reality check. You'll find out pretty quickly if your goals for retirement are realistic, given your age and income. That's why they're so useful. Changing the variables will allow you to fine-tune your retirement age, desired income, contributions and rates of return until you arrive at a plan that's achievable, given your income and budget. If you consistently invest the budgeted amount and select investments that give the returns you need, you have a strong likelihood of reaching your retirement goals.
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.