How Much Do You Need to Retire Comfortably?
Retirement FundingMany people work hard for the majority of their life in order to reach a retirement where they can relax, travel and find time to do things that they truly enjoy. Everyone has different goals for retirement, and nobody knows how long they will live, so how much do you need in order to live comfortably during your post-work years?
While every retiree has a different lifestyle and vision for retirement, it may be helpful to note that the average household expenditure for those 65 and older is around $64,461.1
But just as individuals differ in lifestyle during their working years, the same goes for retirement, meaning everyone’s savings goal for retirement will differ. Whether you are already retired or are just starting to think about your retirement, planning ahead is crucial.
Start by asking yourself important questions like:
Do I want to move somewhere where the cost of living is higher?
Do I have a higher life expectancy?
Do I want to leave a legacy for my grandchildren?
Whatever your goals for retirement may be, there are a couple of helpful guidelines you can follow to better determine how much you may need. This by no means replaces the individualized guidance a financial advisor can offer, but it does give soon-to-be retirees an idea of where to start.
Guideline #1: 70 Percent of Your Working Income
Some believe that saving between 70-100 percent of your pre-retirement income is a good rule of thumb to follow. The exact percentage will vary based on your financial obligations. For example, if you are no longer paying a mortgage and don’t plan on having one in the future, you may be able to get away with preparing to have less in savings for retirement.
Following the 70 percent rule, if you earned $100,000 a year before you retired, you’d want to prepare to live on around $70,000 annually in retirement. Multiply that amount by how many years you plan on being in retirement, and this can give you an estimate of how much you’ll want to save.
Guideline #2: Four Percent Withdrawal Rate
When utilizing the four percent withdrawal rule, the idea is to build up a retirement portfolio that can provide income annually at a four percent withdrawal rate.
For example, say you’ve determined you’ll need around $60,000 per year in retirement. Following the four percent rule, you’d want to do some quick math:
$60,000/4% = $1,500,000
In order to follow the four percent rule, you’d need around $1,500,000 in savings before you retire.
The concept behind the four percent rule is that your annual withdrawal plus inflation are accounted for in your portfolio’s market returns. This assumption is based on historical market performance, meaning there is never a guarantee of future performance. While this strategy may work for those retiring at a younger age as well, remember that younger retirees may not have access to certain steady streams of income like pensions, social security, or other retirement benefits.
Calculating Your Retirement Target
Now that we’ve laid out the framework, let’s crunch some sample numbers.
Say you currently make $100,000. Using the 70% rule, you can anticipate spending about $70,000 annually in retirement. Now, you can use the 4% rule to determine how much you’ll need to save for retirement: $1,750,000.
Individuals or couples making $150,000, can anticipate spending $105,000 annually after retiring. Using the 4% rule, they would need an estimated $2,625,000.
What’s your retirement target? You can plug your current income into this equation to get a rough estimate:
(INCOME) * .7 * 25 = SAVINGS TARGET
When it comes to your retirement, it’s crucial that you are diligent in your planning so that you can live out your final chapter the way that you deserve. If you are used to living a particular lifestyle and want to continue doing it once you are no longer working, planning ahead and working with a knowledgeable advisor is imperative.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.