Answering the question, “How much do I need to save to retire?” is essential to retirement planning. The answer varies by individual, and it is heavily influenced by your current salary and the lifestyle you desire and can afford in retirement.
Retirement gurus provide various advice on how much money you need to retire. Million. But ultimately, what counts is that you figure out how much you need with the guidance of a financial specialist.
What does retirement mean to you?
Understanding what retirement means to you and your partner or spouse is part of addressing how to fund retirement, including what, if any, role the age pension will play in your income.
When you talk about retiring with your partner, use the chance to discuss when you both want to stop working. One person often wants to leave work before the other, or one half of a relationship may be older than the other and want to go to work first. When you both quit your job will affect how much money you have in retirement and your eligibility for any income support, so it’s essential to discuss it.
When it comes to arranging your financial affairs, this is a crucial topic. It will also guarantee that you understand each other’s retirement objectives.
Money needed to retire
1. You’ll need 80% of your pre-retirement salary to maintain your current standard of living. This strategy might work for you if you’re at least ten years away from retirement. However, some critics argue that the 80% suggestion needs to be updated.
2. Save ten times your annual wage by the age of 67. If you follow this rule, you can save enough money to maintain your current lifestyle after retirement. This calculation will need to be adjusted based on your retirement age.
3. Save 10% to 15% of your yearly pre-tax pay. This is yet another method for achieving your retirement objective. Instead of looking at it as a percentage of your total pre-retirement income, this method divides it into annual pieces.
Determine how much you need to save for retirement.
Consider the following procedures to help you assess how much you may need to invest for retirement:
1. Compute your costs.
When calculating how much money you’ll need in retirement, keep the following costs in mind:
• Medical expenses: According to a 2022 analysis from the Employee Benefit Research Institute (EBRI), approximately 40% of retirees reported that their health and dental expenses were more than expected. According to the Fidelity Retiree Health Care Cost Estimate, an average 65-year-old retired couple may need around $315,000 saved to meet health care bills in retirement.
• Housing: According to the U.S. Bureau of Labor Statistics, the average American 65 and older spent $17,454 per year on housing in 2019-2020. That amounts to over $1,455 every month.
• Food: The average American 65 and over spent more than $6,137 per year on food in 2019-2020, more than $511 per month.
• Entertainment: In 2019-2020, the average American 65 and older spent $2,366 per year on entertainment, or slightly more than $197 per month.
• Travel: In 2022, Americans aged 70 and up planned to spend $11,561 on travel, totaling more than $963 monthly.
• Debt: According to a 2020 Clever poll, the average retiree has around $19,200 in non-mortgage debt, such as credit cards
2. Consider the 4% rule.
The 4% rule states that a retiree ought to take out the equivalent of 4% of their savings in the year they retire, then adjust that amount for inflation every year for the next 30 years.
Although the 4% rule is a helpful guideline, it may not correctly represent increases in healthcare expenditures, changes in the stock market, or changes in tax rates.
3. Assess additional income, including labor and investment returns
When considering your financial needs in retirement, keep in mind that you may still be working. Also, examine your investment returns.
Even though you are formally retired, your retirement calculations may sometimes incorporate income from work. According to an EBRI poll conducted in 2022, 70% of American workers anticipated working even after retirement, but only 27% of retirees stated that they did.
When it involves investing returns, a glance back in time can be beneficial. Since 1926, the S& P 500 has produced a 10.09% return on investment. When inflation is factored in, the return is 6.92%. The 500 largest publicly traded U.S. corporations are measured by the S&P 500 index to determine their performance.
4. Figure out your Social Security benefits.
One critical financial factor is the Social Security income you will receive when you retire.
In the United States, the Social Security Administration maintains a free calculator that allows you to determine your estimated Social Security income at 62, 70, and your “full retirement age.
Interestingly, some employees hesitate to get Social Security payments when they retire. In a Nationwide poll commissioned in 2022, 70% of respondents aged 26 and higher expressed worry that the Social Security system may run short of money within their lifetime.
5. Determine how much you want to save.
Set your retirement objectives with the help of a financial professional. However, if you want a ballpark figure for how much you should save for retirement, use the following calculation. Remember that various factors, such as healthcare expenditures and investment returns, can cause this estimate to be inaccurate.
• Monthly budget: $4,500
• Divide your monthly budget by the number of months in a year to calculate your yearly budget: $4,500 x 12 = $54,000 • Divide your annual budget by 25 (estimated years of retirement): $54,000 x 25 = $1.35 million
In conclusion
• There is no right or wrong method to save for retirement. Instead, your retirement savings program should be tailored to your current requirements and future goals. However, some tips might help you maximize your retirement journey. For example, you should estimate your future expenses and compare them to how much money you need to save today (on a percentage basis) to retire comfortably. Doing some basic math and consulting with a financial advisor can set you on the path to your dream retirement.
