How Much to Invest for Retirement – or Christmas

I love Christmas, I really do. The signs of Christmas seem to be popping up all over the place.

The commercials on every channel, twenty-four hour Hallmark movies, the Christmas displays downtown, the crisp in the air . . . and the release of the Christmas Club funds. Friends of ours, Jim and Becky, reminded Jill and me of this last weekend over lunch.

I’m not sure if you remember what these clubs are. I remember as a kid, my mother would truck down to Bristol County Bank in Raynham each week during the year to slap down whatever money she had left over from the week’s paycheck . . . and there was not much.

You see, Christmas Clubs were offered by many banks and credit unions as a special short-term savings account where you could save money every month to pay for your Christmas shopping each year. It provided an incentive for you to save – and not spend – the money. If you take money out early, you pay a penalty. Typically, the funds are released without penalty in November or December, in order to give you plenty of time to shop for the holidays.

After lunch, Becky and Jim were headed to the Braintree Plaza to begin Christmas shopping with their Christmas Club money. Jim and I had a laugh about these old-school accounts and how our kids had probably never even heard of them, but that didn’t deter Becky. She loves her Christmas Club because she says it takes the worry out of paying for gifts for their three kids and two grandkids all in one lump sum. When asked how she figures out how much to put into the account each month, she replied, “Oh, I just put in whatever I can, I don’t really have a formula for it. And I usually end up having quite a bit left over, so sometimes I get to buy a treat for myself, too!”

Jim, on the other hand, wasn’t as excited about the account. He thinks Becky puts away too much money each month, often scrimping on every-day items to make her deposit into the account. He would rather Becky decide exactly how much she plans to spend in advance and then invest with that figure in mind. Becky, however, says that she likes having money leftover at the end of the year, it’s sort of like her “bonus”.

After lunch, as Jill and I were heading home, I got thinking. I got thinking about saving for a much longer-term goal – retirement. And how I see many folks who make the same mistake when deciding how much to invest for retirement: They confuse “should” with “can.” How much you should invest is not dependent on how much you can invest. I believe you should take a much more thoughtful approach to investing for retirement now by figuring out how much you need to invest. So this week, let’s dive down to determine the right amount to save for retirement.

One of the most basic tenets of saving for retirement is to “pay yourself first”. I know this is something I talk about frequently, I get it. But if saving for retirement is important to you, and it should be, it should be the first line item on your budget. The idea is to figure out how much you need to save to achieve your retirement goals, then live on whatever is left over. Of course, the challenge here is that if your goals leave you with too little to live on today, you may need to change those goals so you can still eat between now and retirement.

You can’t just say, “$300 a month sounds good, that’s how much I’ll invest”. What does that mean to you today and in the future? Rather than choosing a random number to hit, it’s important that you calculate how much income you’ll need in retirement and start from there.

It’s estimated that only one in 10 Americans understands the level of savings needed to retire and to live in a fashion similar to their current standard. Get this, only 14 percent of Americans are confident they’ll have enough to live on when they retire. Folks, these are some pretty alarming statistics, so clearly we have some work to do.

So, where do we start? While you should eventually do a detailed analysis of your anticipated retirement spending, don’t fret too much about it when you’re just starting out. One suggestion is to use your current take home pay, after taxes, and use that number as a base. So if you’re taking home $3,500 per month today, assume you’ll need that same amount (adjusted for inflation of 2% to 3% per year) in retirement.

Another common way to estimate your needs in retirement is to use the 80% rule, which says you should aim to replace roughly 80% of your preretirement income. I find this to be a very loose rule: Some people suggest skewing toward 70%; some think it’s better to aim for a more conservative 90% to 100%.

If you’re within 10 years of retirement, you’re technically in transition from the accumulation stage to your distribution stage of your financial life cycle. This is a critical time because retirement is now in sight. We must fine-tune that number to account for things that will change after you retire, which might include adding or subtracting expenses from your current budget. For instance, you might subtract the cost of commuting to work but add in the cost of traveling to see the grandkids more often. And don’t forget to factor in longevity risk, which is the risk that you will outlive your savings. Saving for retirement isn’t just about how much you need each year but also how many years you’ll need to provide for.

Another consideration is your anticipated income from other sources in retirement, such as social security, a pension and your investments. Make sure you transistion your investment strategy from a typical “buy and hold-hope and pray” accumulation strategy to a retirement income, or distribution, strategy. A distribution strategy must be designed to mitigate drastic losses like those we’ve probably experienced in our accumulation strategy since the year 2000.

Folks . . . this is critical, since most of us need our investments to supplement our social security and pension. If our accumulation stategy keeps losing 40-50% every 6-8 years or so, well, what happens to your income plan?

Hmmm . . . think about that for a moment.

So, once you’ve determined how much you need to save today, you should turn a more critical eye to your paycheck. This is when you can compare what you should be saving with what you’re willing and able to save.

You know, it’s important to have a balance between satisfaction today and a comfortable retirement later. When you’re faced with multiple financial goals and limited, competing resources, you have to set priorities. Do you save for retirement or a down payment on a house? Paying for your kid’s education today or taking your grandkids to Disney World every year in retirement?

Investing for retirement shouldn’t be all-or-nothing: You can save for retirement and a happy Christmas at the same time. You just may not be able to save as much as you’d like to in either one.

Keep in mind, too, that money isn’t everything and to remember the spirit of Christmas. Your spiritual relationship, your relationship with your family, your health, a connection to your community and a sense of purpose contribute a heck of a lot more to retirement satisfaction than spending. So, as we think about this, maybe don’t skip Christmas in favor of a couple thousand more invested for retirement!

Be vigilant and stay alert, because you deserve more . . . especially at Christmas!

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at

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