How to Determine How Much You Need to Retire

How Much Do You Need For Retirment | Is 1 million dollars enough to retire

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Ever wonder how much do 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 money they'll need. 

It's not a simple calculation, though there are methods to determine how much you'll need to retire. In this post, I'll discuss how much you may need to retire and possible avenues on how to get there.

Retirement Income Goal: 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 annual retirement 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.

Related Post: Are You Investing For The Long Term? Here's Why You Should

Depending on if you plan to work part-time, you may need more or less, the lifestyle you want to live in your retirement, and other factors such as your health.

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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 you get a 2.5% raise per year, which is very conservative and on par with inflation. In 30 years, your salary would be just over $136,000. Taking 80% of that, your suggested retirement income would need to be roughly $108,800.

The 4% Rule for How Much is Needed to Retire

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 4% 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% rate of return or more with a conservative investment mix.

A conservative investment strategy during retirement may net you a 4% return, allowing you to withdraw from your retirement accounts without losing anything off your balance.

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.

Build Passive Income Streams for Retirement Income

Another way to figure out how to have enough money each year in your retirement is to build up enough passive income to meet your needs. If you need $40,000 per year to retire, you'll need to find $40,000 per year's worth of passive income. 

This could be a combination of dividend stocks, CD/Bond ladders, passive sales revenue from products you created throughout your life, or any other form of passive income.

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Use an IRA to Your Advantage

Increase your personal retirement savings by opening an IRA, such as a Roth IRA, to get tax advantages during retirement. For example, when you open a Roth IRA, you will contribute after-tax dollars to it. Throughout your working life, your Roth IRA grows tax-free. When you reach 59½, you can withdraw money from your Roth IRA tax-free.

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).

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 IRAFidelity recommends those who plan to retire at age 67 to save by age in the following way.

  • Age 25: Save a minimum of 15% of your income.
  • Age 30: Save a minimum of 18% of your income.
  • 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. How? They live on as little as possible for as long as possible. Then they apply all of their income to their debt, and once they pay off their debt, they lock away as much as possible into investments.

A great way to start saving for retirement is to apply any and all tax refunds to your retirement account of choice.

Related Post: 7 Smart Ways How To Spend Your Tax Refund This Year

Calculate Your Cost of Living When You Retire

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 determine better 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. When calculating how much money you'll need for retirement, you can subtract your annual pension benefits and your estimated social security benefits. Subtract any other form of passive income that won't go away.

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.

Relying on your actual savings and investments is better than something that may or may not be there. 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.

Get Out of Debt Before Retirement When Possible

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 is 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 to the future for 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 HOW TO SAVE UP TO
$10,000 EACH YEAR

Download our 11 step guide on how to save up to $10,000 each year. You’ll also get regular money-saving tips sent straight to your inbox!

Unsubscribe at any time. We will not sell your information.

Ideally, you want to get to the point where your passive income from investments and all other sources cover all of your living expenses indefinitely. That's step 6 of 7 of financial freedom.

In the end, it pays to be conservative and save as much as you can.

Do you know your retirement number? How did you figure it out?

How much do you need to retire? In this post, I answer just that. I go over the 4% rule and how to reach your financial goals and retire with enough cash.

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