How Much Money Do I Need to Retire?

How much do I need to retire

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Preparing for retirement is a major undertaking that takes lots of planning and decades to accomplish. A big part of figuring out how to plan and save for retirement is knowing how much money you need to retire. There are a number of different approaches to determining this amount.

Replacing Your Working Income: How Much Will You Need In Retirement

The first step in figuring out how much money you will need to retire is to estimate how much yearly income you will need after you retire. It’s important to ask yourself what kind of lifestyle you want to have in retirement and plan for those expenses. A general rule from experts is that you will need 70 to 80 percent of your current income after retirement, but this can vary widely depending on your current situation and future plans.

Here are some questions to ask yourself about your intended retirement lifestyle:

  • Will you be living in the same house after retirement, and will you pay off the house before you retire?
  • How much do you plan to travel?
  • What else will you be doing in retirement that costs money, i.e. golfing, playing tennis, sailing a boat, or pursuing another hobby?
  • Will you have any income streams after retirement, or do you plan to do anything that could bring in income?
  • How will you handle health insurance, and will your costs likely be higher or lower than they are now?

By looking at your current income and spending, as well as how retirement spending might be different, you can get an idea about the yearly income you may need when you retire. A few important things to note: you won’t have work-related costs like maintaining a professional wardrobe and commuting when you retire, and you will no longer be putting a significant amount of your income into retirement savings after you retire. You may also be in a lower tax bracket after retirement if you expect your yearly income to be lower than it is now or if your retirement savings is in a Roth IRA, where distributions are not taxed.

A Simple Method for Retirement Planning

One way to figure out how much money you may have available for retirement is to do a few simple calculations.

Step 1: Multiply the amount you plan to save for retirement each year by the number of years you have left until retirement. This amount should include the amount matched for any 401Ks that match some of your contributions.

Step 2: Add the amount of any retirement savings you already have.

Step 3: Divide by the number of years you expect to be retired. A healthy couple of 65-year-olds has almost a 50 percent chance of one of them living to age 95, so retirement could be longer than you might think.

Step 4: Add any guaranteed income sources, such as Social Security, annuities or pensions. Keep in mind that the loss of a spouse could mean the loss of their Social Security benefits, their pension, and in some cases, an annuity that was in their name only.

These steps will give you an idea of how much money you will have available when you retire, based on your current level of saving. If the number you get in step 4 is lower than the amount of yearly income you think you will need in retirement, you can figure out how much additional money you will need to save each year by taking the difference between the amount you will have and the amount you expect to need and multiplying it by the years you expect to be retired. Finally, divide that number by the number of years you have left until retirement.

This simple method does not take into account any interest you make on your money or the impact of inflation, but experts who advocate this method feel that these may come close to canceling each other out, so they are not put into the calculations. In reality, you may end up with a higher amount of money available to you per year, but you will probably need a higher amount to cover your expenses because of inflation between now and then.

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How much do I need to retire
Figuring out how much money you need to retire will help you plan accordingly before that time comes.

Using the Interest Your Nest Egg Generates as Income

The calculation of how much money you need for retirement is bound to be different if you plan to use only the interest generated by your retirement savings as income, without touching the principal amount. While the exact rate of interest your money will earn each year may be impossible to know now, experts agree that a four percent rate of withdrawal should allow your principal to be undisturbed in all but the leanest years and allow you to have income without running out for the rest of your life.

The how to plan and save for retirement, as it is called, corresponds to the average stock market return between the years of 1926 and 1976. These years included the Great Depression and a severe recession in the 1970s, so it is a conservative estimate designed to make your retirement income last at least 33 years even through a prolonged, severe downturn.

An annual income of $40-60,000 per year would require savings of $1 to $1.5 million under this plan, but you may not need that much income if you will have Social Security, pension or annuity income. It may be more reasonable to save as much as you can and live off of only the interest if you only need it to fill the gaps between other guaranteed income and the level of income you want in retirement.

When to Start Saving for Retirement?

The best time to start saving for retirement is when you get your first full-time job. While it may seem less critical to saving for retirement than to buy a home or pay for children’s educations, waiting until you are closer to retirement age forfeits the power of compound interest that comes when you hold investments for a longer period of time.

Investing just $2,400 per year starting at age 22 when most people graduate from college will yield more than $724,000 at age 67, but investing $4,800 per year at age 44 will yield only $175,000 by age 67, which is less than 25 percent of the amount earned when you start at age 22, even though the total amount you contributed was virtually the same in both cases.

Investor.gov has a compound interest calculator that can tell you how much your investment will be worth for any time period and at any rate of interest so that you can see the impact of your retirement savings over time.

Sadly, more than 2/3 of people of any age are not saving for retirement and could even end up with no savings when the time comes. This is even scarier for millennials since the Social Security program is underfunded and may not provide the same level of benefits to those under age 35 when they reach retirement age.

Starting retirement savings early will give you the best chance of being prepared when the time comes that you want to retire, and if your savings takes off and beats estimates, you may even be able to retire early or have more flexibility regarding how much you work in those years leading up to retirement, if you should want to do so.

How much do I need to retire
Your retirement saving plan should take into account how you want to spend retirement years.

How to Save More for Retirement

If you see a gap between what you think you can save and what you will need to retire, there are steps you can take to ramp up your efforts so you can meet your retirement savings goals.

First, you can take a look at your budget and see if there are any areas to make cuts so you can save the money for retirement. You may be able to get a less expensive cable package, switch to a cheaper cell phone plan, or turn your thermostat down a few degrees. Whatever you can do to free up money in your budget can help you achieve an earlier retirement and to live more comfortably when you do retire.

When you put money into a 401K or IRA (other than a Roth IRA), up to $6900 of that money per year is shielded from federal taxes for both you and your spouse, so for every dollar you save, you will get a portion of it back by paying less taxes on the money.  For those with higher incomes, this amount could be 25 percent or more.

Getting a second job or finding a way to earn extra income is another way to save more for retirement. Even just a few hours a week could significantly boost your savings. For instance, 5 hours a week at $15 per hour adds up to $3,750 over a year’s time. Experts also recommend taking any raises or bonuses you get and adding them to your savings.

Downsizing is another way to find money you can save. If you can move into a smaller home, you will reduce many of your expenses including your rent or mortgage, utilities for heating and cooling a smaller house, etc.

No matter how you manage to find more money, saving for retirement now will have tremendous benefits when you hit those later years and want to retire while you can still enjoy life.

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