Written by Gary Foreman
From his column Life Stewardship
Jesus warned there would be a cost to pay by those who followed Him. And, of course, this is true. But we’re wise to understand and prepare for the cost of any course of action. This is especially important when it applies to retirement.
The Earlier, the Better
Some say they’re “too young” to think about saving for retirement; others say they’re “too old” to start. Both are wrong—for different reasons. Saving for retirement is best begun when young. The earlier we start, the easier it will be to meet our goals. Even small amounts are beneficial. Money saved in early years has time to grow by the time we retire. It’s the lesson of sowing and reaping (with the benefit of compound interest), so we harvest what we sow in multiples.
It’s more difficult starting to save when we’re older. We lose the advantage of time, so we have to set aside more. But even though retirement may be closer than we’d like, that’s no reason to throw in the towel. Whatever we set aside today can benefit us later.
Let’s consider a few things that may affect retirement savings and future lifestyle.
Historic Rates of Return
Economic conditions change. Markets fluctuate, but over the long term there are trends that can be recognized. Among them are historic rates of return. Over the last 100 years, the stock market has averaged a little less than 10% per year, but results vary. Since 1980, the market has seen years where it lost 36% (2008) and years where it gained 33% (1997). That’s one reason why it’s important to add to retirement savings on a regular basis—and to not panic when there are market corrections.
Protecting Your Nest Egg
Not all types of investments move in the same direction at the same time. Often, as one moves down another moves up. One way to protect our retirement savings is to diversify among different asset types (stocks, bonds, hard assets, cash). Equities pose higher risk, but usually provide greater rewards in the long run. As we get older and savings grow, it may be time to consider less volatile investments, like stocks and bonds. But a proper mix of asset types is important.
Inflation
A recent trip to the gas station or market tells us all we need to know about the impact of inflation on our lives. Whether high or low we need to consider how increases in the cost of living affect retirement planning. Even low levels of inflation (1 or 2%) will affect our purchasing power after a decade or two.
Here’s an easy way to estimate how inflation affects prices. Divide 72 by the inflation rate to get the number of years it will take prices to double. For instance, if inflation is 8% it will take 9 years for prices to double (72/8 = 9).
A retirement plan usually covers decades or more—even if we’re in our 70s. A 65-year-old couple today has a 50/50 chance at least one of them will live into their 90s. We want a plan that will work for decades.
Expected Expenses
Traditionally, financial advisors tell us expenses drop by about 20% when we leave the workforce. That may be a good average estimate, but our lifestyle and plans determine how much we actually spend. Work-related expenses may disappear, and we may be able to sell that second car, but we might have additional expenses, like that hobby we always wanted to try, or the cruise we’ve been putting off.
When nearing retirement, we want to assess our current level of expenses and make adjustments for post-retirement changes. Subtract any expenses that will cease (work clothing, lunches, travel, etc), and add new expenses (travel, hobbies, home repairs, etc). Don’t worry about being exact. The goal is to get a reasonable estimate of post-retirement needs.
Reasonable Withdrawal Rates
Most financial advisors say we can safely withdraw about 4% of our retirement savings each year. That’s a good ballpark estimate. So, if we have $100,000 in retirement savings, we could afford to withdraw $4,000 annually.
We can use this method to calculate how much we’ll want to save for retirement. Take the amount we’d like to withdraw each year and divide it by .04. If we’d like to withdraw $5,000 a year for 25 years from our retirement account, we would need to save $125,000 (5,000/.04 = $125,000).
It may be we’re approaching the time when we had planned to retire, but don’t have enough set aside to reach our goals. In situations like this, if physically able, we may need to postpone retirement, or supplement income with employment.
Retirement should be a time when we look back on our service to the Lord, slow down, and do some things we’ve looked forward to. We recognize the Lord is our Provider, but it’s up to us to act responsibly and prepare for our future this side of heaven.
Gary Foreman is an assistant pastor, author, former financial planner, and founder of TheDollarStretcher.com and after50finances.com.
Editor’s note: Within the Nazarene 403(b) Retirement Savings Plan, P&B offers a traditional 403(b) plan, which allows ministers to set aside money pre-tax and receive distributions in retirement as housing allowance, subject to IRS guidelines. As of July 1, 2022, the church also offers an after-tax Roth 403(b) , which is funded by after-tax contributions now, in exchange for tax-free distributions in retirement. Learn more about the new Roth 403(b) here.
Investing involves risk, including risk of loss.