People near retirement age often wonder just how much of their income should be invested to ensure they have enough money. In today’s world, there are even more things to consider, such as How the “New Normal” May Impact Your Retirement. While the answer varies based on your unique circumstances, there are some standard questions and answers that may help you prepare and understand what it will take for you to be able to have the retirement you have always dreamed of.
What Percentage of My Income Should I Save for Retirement?
There are many unknown variables that make it difficult to accurately forecast retirement needs. How much money you need to live comfortably during retirement varies widely depending on the individual. Knowing how much you need to save can help you stay on track and reach your retirement goals.
In The Center for Retirement Research at Boston College brief, How Much To Save For a Secure Retirement, a simple model was developed to estimate what percent of a person’s earnings must be saved to ensure a financially secure retirement. The replacement rate model – retirement income relative to pre-retirement earnings – provides the framework to maintain pre-retirement living standards. On average, most Americans will need a replacement rate of around 80%. To illustrate, assuming your ending annual salary is $75,000, you would need approximately $60,000 per year to finance your retirement.
How Much Money Do You Need to Retire Comfortably?
Base your retirement savings on what you expect to spend. Having a percentage or dollar amount to give you a rough idea for planning can be helpful, but you can’t solely be focused on that. Everybody’s lifestyle is different. What they want to do in their retirement years may be very different as well. Rather than rely on a general figure, try to create a ballpark annual estimate based on what you live on now and what might change when you retire.
There are numerous ways to find out how much money you must save to get the retirement income you want. The simplest way is to use the 4% Rule. Using this approach, you divide the desired annual income by 4%. Assuming your desired annual income is $60,000, you will need about $1.5 million.
Note: This assumes a return on investment of 5% and doesn’t include Social Security benefits.
How Much Should I Save for Retirement Each Month?
A simple guideline is to follow the 50/30/20 Rule. 20% of your income goes toward savings, 50% for necessities, and 30% discretionary. Keep in mind that this goal includes saving for retirement and emergency funds. More is fine; less is not advised.
How Much Do I Need to Retire At 62?
Trying to figure out whether you can afford to retire is like putting together pieces of a financial jigsaw puzzle. First, you need to estimate how much you’ll need to finance your retirement. Then you must consider all the income sources – Social Security, 401(k)s, and pensions, if you’re fortunate. The overarching goal is to assemble all of the financial pieces and then see whether the picture of retirement life that emerges is acceptable to you.
A Word of Caution
The COVID-19 pandemic has shattered the physical, psychological, and financial security of many Americans – including future Social Security beneficiaries.
In a July 30 report, the Center of American Progress warned Americans who become eligible for Social Security in 2022 will likely receive less in benefits over their lifetimes due to the pandemic. Moreover, the crisis has shaken the economy. Millions have become unemployed or saw a reduction in wages. The Social Security Administration uses these data points to calculate individual benefits. They also consider the growth of average wages in the country since the year the earnings were received, which would diminish the benefits of those who claim in the next couple of years.
Overcoming Retirement Shortfalls
Retirement is in your horizon, but you’re not financially ready, what can you do?
Consider other alternatives that can reduce how much you need to save. The most obvious one is to think about delaying retirement by a few years. That strategy will allow you make more contributions to your retirement accounts while postponing withdrawals – which could significantly increase the size of your nest egg even as it reduces the amount you need to accumulate to make it through retirement.
Getting a part-time job after you retire can also make a big financial difference – and can provide mental, physical, and emotional benefits as well. Other options include trading, downsizing, and reining in your spending.
Another way you can help ensure you have enough money during retirement is by investing for income. For more information and tips, read 10 Ways to Invest for Income.
Finally, it’s important to consider how your expenses will change in retirement. Some, like healthcare and inflation, will certainly increase. It would behoove you to do your homework and consult with loved ones, financial, and tax specialists to help ensure your best retirement life.
Talk to an Income Specialist Today
If you want to get some more advice on Retirement Income Planning, contact an Income Specialist today.
Sources
- Center for Retirement Research at Boston College. How Much To Save For a Secure Retirement, https://crr.bc.edu/wp-content/uploads/2011/11/IB_11-13-508.pdf
- https://www.americanprogress.org/issues/economy/news/2020/07/30/488358/social-security-benefits-workers-turning-60-2020-will-likely-drop-due-coronavirus-pandemic/