How much money do I need to retire?
The amount of money that you will need to have saved in order to retire will depend on how much you will spend. The many ways on how to save for retirement may depend on several factors, including your budget, expenses, taxes, and the length of time that you live post-retirement.
One rule-of-thumb to determine how much you need to retire is to figure out the amount you will need to have in order to live on 80 percent of your pre-retirement income. However, this is not exact and might mean that you either will have more or less than you need.
You can instead figure out your retirement budget, taking into account all of the different expenses that you anticipate having at that time. You also need to think about the lifestyle that you would like to enjoy. Finally, you should take into account the taxes that you will have to pay as well as your health care costs and potential long-term care needs.
Average retirement age and retirement savings trends
The average retirement age in the U.S. is 63. However, this varies by geographic area. People who live in the Northeast have an average retirement age of 65 while the retirement age is lower in states that have high rates of unemployment.
The average Social Security retirement benefits amount in the U.S. is $1,419. Despite this, a majority of people do not have enough saved for retirement. People who are between the ages of 55 to 64 only have a median retirement savings of $107,000.
It is important to note that a median amount is not the same as an average, and many people have far less saved or nothing at all. An amount of $107,000 in retirement savings is simply not enough. If that amount was invested in an annuity protected against inflation, the Government Accountability Office reports that it would provide only around $310 per month.
What are some ways on how to save for retirement?
Saving for retirement is something that you should start now if you have not already. To build the amount for how much you need to retire, you can take several steps.
Review your investments and make adjustments according to your age, time horizon, and risk tolerance. If you are young, you can be more aggressive in your choices. A review can also indicate if you need to rebalance your investments. If you are getting closer to the age at which you plan to retire, your investment strategy should become more conservative.
Review your expenses with the aim to spend less. Track your spending and identify areas where you can make cuts. You should spend less than you earn and devote any extra money that you have above your daily living expenses to your savings. There are online budget tools that can aid in keeping track of money habits and assist in bill payments.
In addition to increasing your savings, automate them. Automating your savings helps you to live on less than you earn. You can set up automatic transfers from your account at the beginning of each month, which will automatically force you to live on less than you earn while you increase your savings.
If your employer matches contributions up to a certain percentage in your 401(k) account, make certain that you contribute at least the matched amount. Matching contributions are essentially free money. If you do not contribute the matched amount, you are giving away free money that can help to accelerate your savings.
Downsizing can also help you to save more money. Take an inventory of all of your possessions and sell what you do not need. Cut out extraneous expenses including your daily stops at the local coffee shop or lunches out while you are at work. These small changes can combine to make a large positive impact on your budget, your savings, and your life.
Estimate living costs
Estimating your living costs in the future might seem especially hard if your retirement is years away. While it is hard to speculate exacts costs and a realistic lifestyle, it is important to financially plan as early as possible.
You can start by using a retirement calculator to have a rough estimate of how much money you need to retire. The Social Security Administration has a retirement calculator that you can use to get a general estimate of the benefits that you might expect to receive. In addition to your future expected benefits, you also need to figure out how much you need to retire to pay for your potential living expenses.
Think about the lifestyle that you expect to have when you retire and compare it to your current savings and the amount that you will have saved if you continue saving at your current rate. You may find that you will either need to make adjustments to your expected lifestyle or save more.
Consider inflation while you calculate how much to save for retirement. The dollars that you save now will be worth less in the future, so figuring the potential impact of inflation is significant. You have to consider your long-term investment choices and how they perform with inflation.
Inflation also impacts your future health care costs and long-term care needs. It is predicted that retiree healthcare expenses will continue to increase at an average annual rate of 4 percent. After you retire from your job, you will not have your employer-provided health care benefits. Take into account the costs of a private insurance plan. If you plan to retire after you reach age 65, take into account your Medicare premiums and the costs of any supplemental plans that you intend to purchase.
Do not overlook the potential for needing long-term care. The U.S. Department of Health and Human Services reports that someone who turns 65 today has a 70 percent chance of needing long-term care at some point in their lives. Services that are covered differ among insurances, so being financially prepared is your best plan.
You might want to look into purchasing long-term care insurance or a whole life policy that has a long-term care rider. Investigate other potential sources to pay for long-term care like veterans’ benefits. As you draw closer to retirement age, you might want to meet with an estate planning lawyer to discuss whether Medicaid planning might be an option for you.
Consider how long you might live. You can look at life expectancy tables for your gender and year of birth. To get a better idea, think about how long the members of your family tend to live. People are now living longer, which means that you might need to save enough money to last for more years than your parents or grandparents did.
Take into account your future Social Security benefits and any pension that you might receive. Do not forget to figure out the tax implications of your different retirement income streams, including your 401(k), IRAs, and your Social Security benefits. You will be taxed at your ordinary income tax rate when you begin taking withdrawals on most types of tax-advantaged retirement savings other than a Roth IRA, which is not taxed when you begin taking distributions. Become familiar with early withdrawal rules and exceptions, in the possible event that you need to access funds.
Retirement savings strategies
There are several different strategies for saving for retirement that you can implement. Consider each one and choose the saving for retirement strategy that appeals to you the most.
The 4% rule states that you should save enough so that you can safely withdraw 4 percent a year from your retirement savings portfolio to support your lifestyle and your expenses after you retire. The 4% rule is more about the amount that you withdraw in retirement rather than the amount that you need to save because 4 percent is considered to be a safe withdrawal method. The idea behind this is that keeping your rate of withdrawal to that percentage or less might allow you to live off the interest on your principal.
The Multiply by 25 Rule states that you should multiply the annual retirement income that you want to receive by 25 to see how much you will need to have saved for retirement. For example, if you want to have an annual retirement income of $50,000, you can multiply 50,000 by 25 to arrive at a total savings amount of $1.25 million. This rule also can be understood to state that the average retiree will need to save between 11 and 12 times of his or her salary at retirement age.
Another common rule of thumb is to invest 15% of your gross income for a long time starting in your 20s or 30s. By doing this, you should have enough money saved by the time that you retire. This strategy bases potential success on compound interest. This might be a basic savings strategy that you can follow if you are young, but it might be better for you to strive to save more.
If you are young and want financial independence early, your strategy might be different. The Financial Independence Retire Early (FIRE) movement is an aggressive savings strategy combined with extreme frugality. Under the FIRE method, you might try to downsize and live on the bare minimum while you save as much as 70 percent of your income for your retirement. Real estate investments and multiple sources of passive income avenues are also common in this strategy.
What can you invest in today?
When you are trying to figure out how much you need to retire and are engaged in retirement planning, take a look at the different types of investments with a long-term view. Use a retirement calculator that takes into account your expected annual rate of return for your portfolio. This return rate is the yearly profit or loss amount that you expect on an investment.
If you have a 401(k) plan available to you at your job, you should take advantage of it. Take a careful look at your 401(k) plan. Does your company offer matching contributions? If it does, participate in them. Look for investments with low fees and a good average rate of return. There might be a variety of mutual funds available, and there may be investments that have a short vesting schedule.
There are variances between employer plans, so it is important to become familiar with yours. Some 401(k) plans automatically enroll employees. On others, the contribution percentage is increased every year. Selected companies offer a Roth 401(k) option. If yours does, the Roth account might make sense because your dollars go in after-tax, which means that your withdrawals will be free from tax when you begin taking them from your Roth.
You should look beyond your 401(k) with your retirement planning. Consider opening an IRA in addition to your employer-sponsored 401(k) plan. A traditional IRA is a tax-advantaged retirement account. Your dollars go in on a pre-tax basis so that your savings might have the potential to grow even more.
The annual contribution limit for an IRA is $6,000 plus an additional $1,000 if you are 50 or older. Through your IRA, you are allowed to invest in mutual funds, ETFs, individual stocks, bonds, and other types of investments that might provide you with a higher rate of return. IRA contributions may also be tax-deductible when you make them, but you will be taxed at your ordinary income tax rate when you start taking distributions in retirement.
A Roth IRA is another type of individual retirement account that you might want to consider. The total contribution limit is the same as for a traditional IRA, and if you have both types of IRAs, the aggregate amount that you can contribute cannot exceed $6,000 per year if you are under age 50 or $7,000 per year if you are older than 50. Roth IRAs have maximum income limits to make contributions, but your withdrawals are not taxed when you begin taking them.
If you are self-employed, you can open a SEP IRA as a part of your retirement planning strategy. This stands for Simplified Employee Pension IRA, and it offers you a higher annual contribution limit. You can contribute up to $56,000 per year to your SEP IRA or 25 percent of your income, whichever is less. If you have employees, however, you must contribute the same percentage to their accounts as you do your own.
A SIMPLE IRA is an employer-sponsored plan that employers might offer instead of a 401(k) plan. The Savings Investment Match Plan for Employees allows you to contribute a maximum of $13,000 per year if you are younger than 50 or $16,000 if you are 50 or older. You might be able to invest in stocks, bonds, and real estate investment trusts to help you to save how much money you need to retire with a safe withdrawal rate.
In addition to your retirement savings, you should also consider your cash accounts. These include your Money Market Account, savings account, and your Certificates of Deposit. Finally, you should also include any savings that you might have in a Health Savings Account when you think about the amounts that you determine with a retirement calculator.
When you choose investments and a brokerage, it is important that you work to keep the fees that you will pay as low as possible. Management fees and commissions can quickly eat into your savings, which means that you will earn less over time than you might otherwise. Even small fees add up when you have long-term investment accounts.
Your asset allocation is important. You will want to diversify your portfolio and invest your money over at least a few asset categories. A diversified portfolio can help to protect you against losses in one category when others have stronger rates of return. This helps balance the risk and returns among your investments.
Whatever the types of retirement accounts or pension plan that you have, you should have a goal of maxing out the annual allowed contributions to each of them. If this is not currently feasible, work to eliminate your debt, cut your expenses, add income streams, and increase your savings gradually over time until you can maximize your contributions.
Automate your contributions. As we discussed earlier, automation can help you to save more and to live on less than you earn. Avoid withdrawing money from your retirement savings. If you do, you may face early withdrawal penalties. Money that you withdraw also does not allow you to benefit from compounding interest.
Finally, review your portfolio at least annually, and estimate the return on investments in your portfolio. You should rebalance your portfolio each year to reach your target allocations. You can estimate your returns by researching individual securities. Doing this can allow you to see the historical rate of return for each one that you have. You can then use a retirement calculator to get an idea of the amount that they might be expected to grow at your current savings rate.
The final step in figuring out the amount of money that you might need in retirement is to think about all of the sources of income that you will have. Your retirement income might include multiple streams that should be taken into account when you use a retirement calculator. Some of these might include the following:
- Fixed annuities
- Real estate investment income
- Interest income
These types of income streams are called passive income and are in addition to any retirement accounts or pension plan that you might have. You might also consider working a part-time job in retirement. Working even a few hours per week can help you to enjoy a more comfortable retirement, and a part-time job might also offer health benefits.
Maximize your Social Security benefits. To do this, make sure that you have a minimum of 35 years of earnings since your benefits are calculated on the highest 35 years of work income. Put off taking your Social Security benefits until you reach full retirement age in order to receive the entire amount of benefits. However, waiting until you are 70 will provide you with more. Delayed retirement credits are an incentive by the government where benefits are increased by a certain percentage, determined by your age.
When you do retire, take systematic withdrawals from your portfolio at a set percentage instead of taking out lump sums. Finally, laddered bonds might be a good idea. This is a portfolio that contains bonds that have different maturity dates and can help you to boost your returns by consistently reinvesting.
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