When it comes to retirement planning, people have a lot of questions. One question, in particular, that usually tops the list of many is – How Much Do I Need to Retire, or How Much Do I Need to Save for a Comfortable Retirement?
There is no one answer to this question, rather, the requirement is different for everyone. This is because the amount of money you need depends primarily on your desired lifestyle and financial goals. However, if you want to have a general idea of the money you need for your retirement, then there are a few expert tips that can help you.
The 80% Rule
Many experts will tell you that you need roughly 80% of your pre-retirement annual income when you retire for a comfortable living. This means that if your pre-retirement income is $100,000 a year, then you will need $80,000 to live comfortably during retirement.
You won’t need 100% of your pre-retirement income because you are able to eliminate (or at least reduce) some expenses when you retire. For example, you won’t need to save for retirement, you’ll spend less on commuting, etc.
People, however, would need to adjust (upward or downward) this 80% depending on the retirement lifestyle they want, or if they believe their expenses would be significantly different when they retire. For example, if you plan on traveling frequently during retirement, then you will need more than 80% of your pre-retirement income.
The 4% Rule
This 4% rule will help you determine how much you need to save for a comfortable retirement. In general, 4% is considered to be a safe withdrawal rate for a 30-year retirement. This rule implies that you should withdraw 4% from your retirement fund in the first year of retirement. You will have to adjust the amount for the subsequent years depending on the rising cost of living.
The 4% rule, however, won’t work if a 4% withdrawal isn’t enough to cover all your expenses during retirement. So, once you have settled on your retirement corpus, you can use the 4% rule to determine whether or not it would be enough to pay for all your expenses.
To get a clearer idea, you should add other sources of income, such as Social Security and pensions (from current or former jobs), when applying the 4% rule. You can also consider any other predictable and permanent sources of income, such as an annuity.
Social Security is an important source of income for most people, but it usually forms a smaller percentage of income for higher-income retirees. For example, for someone earning $50,000 annually, Social Security will replace 35% of their income. On the other hand, for an income of $300,000 per year, Social Security would just be able to replace 11%, as per an estimate from Fidelity.
If you feel 4% isn’t enough, then you could consider saving more, or working for a few more years, or both.
Retirement Savings by Age
Apart from the above two rules, experts also recommend altering your savings habits by age. Moreover, knowing how much you need to save at different stages of your life, gives an easy answer to the question – how much do I need to retire?
According to Fidelity Investments, you need to save about 15% of your gross salary starting in your 20s, and continue with the same throughout your working life. The 15% should include savings across various retirement accounts and employer contributions (if any).
Further, Fidelity has also come up with targeted savings for different ages. As per Fidelity, you should have saved 1x your annual salary by 30 years, 3x by 40, 6x by 50, 8x by 60 and 10x by 67.
Some also recommend saving 25% of your gross salary each year, starting in your 20s. Saving 25% may appear challenging, but the task becomes easier if you consider other types of retirement savings (not just 401(k) holdings and matching contributions from your employer) as well.
Based on this percentage (25%), the targeted savings is 2x the annual salary at 35 years, 3x the annual salary at 40, 4x the annual salary at 45, 5x the annual salary at 50, 6x the annual salary at 55, 7x the annual salary at 60, and 8x the annual salary at 65.
Using Online Calculators
In addition to the above tips, you can also use the help of online calculators to find out how much you would need to retire. These online calculators are easy to use. Along with giving an idea of your retirement goals, these calculators are also a great way to understand how changing savings and withdrawal rates can impact your retirement. Several calculators are available online.
As said above, there is no one best way to find out the answer to – How Much Do I Need to Retire? The above discussed methods could surely give you an idea of the savings and retirement fund, but you must not totally rely on them. This is because investment performance will vary over time, and projecting the actual income requirements is no easy task as well.
Another uncertainty that makes retirement calculations extremely difficult is no clear retirement age. Many people retire earlier than they planned to due to layoffs, health issues, and more.
Still, using the above methods and tips is a good starting point to find an answer to the question – How Much Do I Need to Retire?
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