Charles Schwab & Company recently released its 2023 Modern Wealth Survey, polling a cross-section of Americans and asking the average net worth needed to be among the ranks of the rich. The result was $2.2 million.
Almost half of respondents said they feel wealthy today, with an average net worth of only $560,000. Surprising to some, the younger generations, millennials and Gen Zs, were more optimistic about their financial situation than their older counterparts, Gen X and Baby Boomers. I think the reason is that the closer you get to retirement, the more clear-headed you become.
Planning for retirement is essential to ensure a secure financial future that suits your lifestyle. The earlier you figure out your financial needs, the better. According to the survey, 66% of people believe that ‘wealth’ goes beyond just money and includes strong relationships with loved ones. However, it is important to remember that although happiness and wealth can co-exist, they are not the same.
A Framework for Defining a Healthy Retirement
Your pre-retirement income usually determines your retirement lifestyle as it dictates your ability to cover essential and non-essential expenses. To estimate the investment assets you need to accumulate, a general guideline is provided below:
- Multiply your annual income (gross) X 10: For example, if your annual work earnings are $100,000, $100,000 X 10 = $1,000,000. This is the minimum amount of investments (Traditional IRA, Roth IRA, personal investments, etc.) you will need to accumulate by retirement, and it assumes retirement at ‘Full Retirement Age’ for Social Security purposes. Together with social security, this should provide you with 70% to 80% of your pre-retirement income.
- Multiply your annual income X 20: In this example, $100,000 X 20 = $2,000,000. Using a 5% withdrawal rate on $2 million will provide $100,000 of gross income, and you will have your Social Security income for additional financial cushion.
What You Should Do Now
- Using either formula, determine where you are now and what changes you need to make to achieve your goal. Actions might include increasing your company 401(k) contribution, setting up a Traditional or Roth IRA, or opening a personal investment account and making automatic monthly deposits.
- Monitor your progress at least annually and adjust as needed. Consider committing a portion of all pay increases or cash bonuses to your investment program. My recommendation is at least one-half.
- Seek help from a Certified Financial Planner. A CFP can validate your plan and assist with investment strategy, cash management, income tax and insurance planning, and more. Find a CFP near you at CFP.net. You will want to choose someone with at least ten years of experience and be sure to have them explain how they get paid for the work they will do for you.
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Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including 50 Rules of Success; J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group. Consult your financial advisor before acting on comments in this article.
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