Do you ever wonder how much you need to retire? I know it's a thought on a lot of people's minds. Some people want to retire while they're young, whereas others are getting older and want to know how much more they'll need.
In this post, we'll discuss how much you may need to retire and possible avenues on how to get there.
80% Of Your Annual Income
Do you have a retirement plan? When setting retirement goals, one goal is figuring out how much income you'll need. A general rule of thumb is that your retirement annual income should be around 80% of your projected pre-retirement income.
So, if you're making $100,000 per year, you would want to have enough money saved where you could withdraw $80,000 per year without running out of money before the end of your life.
You may need more or less, depending on if you plan to work part-time, the lifestyle you want to live in your retirement, and other factors such as your health.
One way for calculating the future value of your current salary is to use an online financial calculator. Let's say your salary today is $65,000, and you plan to work for 30 years.
For argument's sake, let's say inflation is going to average 2.5% per year. In 30 years, your salary would be just over $136,000. Taking 80% of that, your suggested retirement income would need to be $108,800.
Related Post: 8 Amazing Ways How To Save $10,000 In A Year
The 4% Rule
Another way of looking at how much you'll need to retire is known as the 4% rule. If you determine that you'll need $40,000 per year to retire, you figure out what $40,000 is 4% of. A simple calculation of $40,000 divided by 0.04 yields you a required retirement savings of $1,000,000.
The idea here is that with $1,000,000, you should be able to withdraw up to 4% per year and live comfortably while the money grows at 4% or more with a conservative investment mix.
A conservative investment mix during retirement could include 40% stocks 60% bonds. Note, this stocks and bonds mix is an example and not intended to be financial advice for you particularly.
To keep up with inflation, you would need to withdraw slightly more money each year. However, with the 4% rule, your money should last you 25 or more years if withdrawals and returns are consistent.
How Much To Save For Retirement
There are many ways to save up for retirement. Some people will work for decades, while others will attempt to retire as young as possible, a concept known as FIRE (Financial Independence, Retire Early), a concept we'll cover in a future post!
Making a long term savings goal will benefit you regardless if you plan to work most of your life or if you attempt to reach FIRE.
The slow-and-steady way involves investing money from each paycheck into a retirement account, such as a Roth IRA. Fidelity recommends those who plan to retire at age 67 to save by age in in the following way.
- If you start at age 25: Save a minimum of 15% of your income.
- If you start at age 30: Save a minimum of 18% of your income.
- If you start at age 35: Save a minimum of 23% of your income.
Note that this if you plan at age 67. If you want to retire earlier, you will need to put away as much money as possible. People following the FIRE approach lock away 50% to 80% (or more!) of their income.
Figuring In A Higher Cost Of Living
The average rate of inflation each year hovers around 2.8%. That means your present day dollar will be worth less each year and certainly much less after 10, 20, or 30 years. You can use a retirement calculator to better determine how much money you'll need in future terms.
When using the retirement calculator, you can also figure in the return on your investments, such as your 401(k), Roth IRA, or taxable accounts. This should give you a better picture of how much you need to retire. When in doubt, consult with a certified financial planner.
Social Security Income And Pensions Might Not Be Enough
I wanted to touch on social security and pensions, if you actually have a pension. I say that because they are increasingly rare these days. When calculating how much money you'll need for retirement, you can subtract your annual pension benefits and your estimated social security benefits.
The thing is, we don't fully know if social security will be around or if it will be changed significantly when we're old enough to claim it. If you're relying on social security at a certain age and the minimum age for full benefits is raised as you are aging, that could throw your plans off entirely.
This is not specific financial advice, but relying on your actual savings and investments is a much more reliable retirement income than what may or may not be. That said, social security is currently available and is designed to replace a portion of your income.
In general, having multiple sources of income and a larger nest egg will better secure your retirement.
What About Debt?
If you think you're going to be in debt when you retire, you'll want to make sure you have extra income until your debt is paid off. The less debt you have in retirement, the better. Mortgages and credit card debt are two types of debts that are common as one reaches retirement.
Related Post: 9 Ways How To Get Out And Stay Out Of Debt
If you have a mortgage that you have been chipping away at over the years, paying it off before retirement might be a good idea if it's possible with your income.
High interest debt, sometimes referred to as “bad debt,” is something to watch out for. This could include credit card debt that you haven't paid off.
When considering how much you have saved for retirement, consider taking your total and subtracting all forms of bad debt to get a more accurate number as to where you stand. When it doubt, pay off the debt.
Wrapping It Up
When looking into the future to retirement, the bottom line is that you want to save as much money as possible. It's impossible to tell what might happen in the future. You may live a lot longer or have much greater expenses than you anticipated.
Learn all about saving for the future with The Dollar Blogger's Money Mastery System. I will teach you how to crush debt, lower your bills, earn more, and invest for the future.
In the end, it pays to be conservative and save as much as you can. We'll talk more about other retirement-related concepts, including FIRE, in later posts. Stay tuned!