It doesn’t need to be difficult to answer the question, “How much money will I need to retire?” Although everyone may have different ideas about what their retirement should look like, it is useful to review existing benchmarks to help you determine if you are on the right path.
It is important to determine your needs and goals. This includes the amount you plan to spend on retirement each year. It all depends on when and how much you want to retire. A person who retires in their 40s or 50s will require more money than someone who is working longer and retiring in their 60s.
These questions and strategies will help you calculate how much you’ll need to retire.
How Much Money Do You Need to Retire?
This question is not universally answered. The amount of money that you need will depend on your financial situation and retirement goals. Your age, income, and lifestyle will all impact the amount you can retire. Your retirement costs will be higher than your expected. You’ll need more money to retire.
Although it is difficult to calculate, these questions can help you plan your retirement.
- What time would you like to retire?
- Are you willing to work part-time?
- What will happen to your expenses after you retire?
- Which income sources are available after retirement?
- Are you looking to move to a less expensive area of the country?
- What length of time do you anticipate your retirement will last?
Consider this example to understand why a personalized retirement plan is necessary. Imagine Kayla and Kimberly want to retire in 20 years time and have $100,000 each. Kayla would like to travel more after she retires. Kayla’s annual retirement cost is estimated at $100,000. Kimberly plans to relocate to a more affordable area of living and will spend $40,000 per year in retirement. Kayla’s retirement expenses will be higher so she’ll have to save more than Kimberly. As with Kayla and Kimberly, the amount that you need to save depends on your goals.
Many retirement-saving strategies are recommended by financial experts. Each recommendation is worth considering carefully. Let’s look at three guidelines.
Percentage of Your Salary
Experts recommend saving at least 70-80% of your pre-retirement income. If you earn $100,000 per year before retiring, this means that you can expect to spend $70,000-$80,000 in retirement.
This strategy has the advantage of being easy to calculate. You can also use the result to calculate how much you should save for retirement. If your income is $50,000, and your retirement plan lasts at least 30 years (or $500,000 x 30), you will need approximately $1.5 million to save for your nest egg.
This guideline doesn’t take into account inflation, which is a big problem. Without looking at your salary and adjusting it for inflation, you won’t be able to determine how much you will need to retire. An inflation calculator can be used (search for “forward rate flat rate”) to determine how much you will need to retire. Or, you can follow the rule of 72.
Divide 72 by the average inflation rate and you will get the time it takes to double your living costs. It will take 24 years to double if you use a 3% inflation rate. This is a good rule of thumb, but it’s not the most accurate.
It’s difficult to know how much money you will need, as it is hard to predict the length of your retirement. However, it can be used as a guideline for setting aside a portion of your income in retirement savings and retirement accounts.
The 4% Rule
The 4% rule is the minimum withdrawal rate that you should take from your retirement savings to ensure your money lasts at least 30 years. You will withdraw 4% from your funds if you follow this guideline. You’d also adjust your withdrawal rate to reflect inflation over the next years.
Imagine that you are planning to live on $40,000 per year in retirement. To retire on the 4% rule, $1,000,000 would be required, which is 25 times your annual expenses. You’d be able to withdraw $40,000 per year once you reach that goal.
If inflation were 4%, then you would withdraw $41,600 in the second year ($40,000 X 0.04 +$40,000 = $41,600).
This percentage may be common among FIRE members (Financial Independence Retire Early) This is because retirements have one of their biggest concerns (and most dangerous): running out of money. Although there is no way to predict your life expectancy, it’s better than being sorry.
The 4% rule has its advantages and disadvantages. If you don’t have enough savings, taking out 4% every year could cause you to run out faster. Market fluctuations are not included in the rule. Experts believe that spending more when the economy’s doing well and less when it’s not can help you save money for retirement. This is often referred to as dynamic spending.
Multiples of Your Annual Income
Fidelity suggests that you save a percentage of your salary, based on your income and age. This is because your age can have a significant impact on how much you save for retirement. When you are younger, you start at a lower percentage. By the time you retire, compound interest has done its job and will help you have a comfortable retirement.
According to the brokerage, you should start saving 15% of your gross income when you are 25 and invest heavily in more risky assets such as stocks. You should have at least 50% saved by the age of 30. You could save more with your 401k.
Retirement Goals by Age
Here’s a table that shows an estimate of how much of your annual income you should budget for retirement by age.
|30 years old
|½ x annual salary
|1 x annual salary
|40 years old
|2 x annual salary
|3 x annual salary
|50 years old
|4 x annual salary
|5 x annual salary
|60 years old
|6 x annual salary
|7 x annual salary
|67 years old
|8 x annual salary
|8 x annual salary
How Much Money Do I Need to Retire At 55?
Fidelity recommends saving at least seven times your annual income if you want to retire at 55. If your annual income is $70,000, that means you should save $490,000. This is an estimation, and it does not take into account your goals or other unknown variables such as your future medical costs and life expectancy.
Keep in mind, however, that waiting until retirement can have many benefits. If they wait until they reach the full retirement age of 66, people born between 1943-1954 can receive 100% of their Social Security benefits. The benefits will increase the longer you wait – up to 132% for those 70 years and older.
Waiting could affect the amount of your pension you will receive in retirement if you are expecting to receive one. It will depend on your income and years of service. For more information, you will need to contact your benefits department. You can also wait until you are 59 1/2 years old to withdraw money from a Roth Individual Retirement Account (IRA). This will allow you to access your funds without any penalty. You can also wait to make more catch-up contributions if you are over 50 years old. Additional funds investors can add to certain funds such as IRAs and 403(b), 401(k), and 401(k).
The Bottom Line
If you adjust your preretirement earnings for inflation, saving 70-80% of your preretirement earnings could help you maintain a similar lifestyle to your current one. When reducing your retirement assets, the 4% rule can be used. The multiples of your annual income strategy will help you determine how much to save based on your age.
No matter what strategy you choose to use, it is important that you start planning right away. Your retirement assets will grow faster if you get started as soon as possible. You can always adjust if things don’t go as planned.