How Much Do I Need to Retire (and How Do I Get There)?
What does your retirement dream look like? Is it warm, sandy beaches with comfortable chairs snugly set in the sand? Or does it include travel to far-off corners of the globe, like tea estates in Sri Lanka, sacred temples in India, or Tuscan hill towns? Are you a homebody looking forward to spending more time with grandkids or finally getting to all those Saturday farmers’ markets downtown?
Whatever our retirement dreams, we all want confidence that we’re prepared for the future. But many people are far away from having that confidence. They’re wondering how much they need to retire, and how to get there. It’s tempting to avoid that uneasy feeling in your stomach by just trying not to think about it.
Don’t Let Fear of the Unknown Hold You Back
But don’t let fear of the unknown keep you from taking a good, hard look in the mirror right now. If you find out what you need and how to prepare, you’ll feel better now and in the future.
Nationwide, there’s cause for concern. About 50 percent of Americans report having only $1,000 in savings. More sobering still is that 34 percent report having zero savings at all.
While there are plenty of reasons for avoiding the heavy lifting essential to create a financial plan for the future, beginning where you are will save you a lot of angst down the road — and it puts you in the driver’s seat now, which will ease your anxiety.
There’s No Time Like the Present to Prepare
First, let’s address a popular myth that results in many people putting off retirement preparation: “It’s too far off,” or “I’m not that old.” The reality is that there’s no better time than the present. Financial planners emphasize it’s never too early to start saving money away for retirement.
According to the Internal Revenue Service, an employee must meet conditions for an employer’s plan, but you can always begin immediately by opening an Individual Retirement Account (IRA) at your local bank, credit union, or online through Vanguard or other retirement savings account providers.
If your employer does offer a 401K matching program, participating is a fantastic way for you to give yourself a raise! Find out what percentage your employer matches and aim to make the most of the company match. No matter where you are in your career, it’s smart to take advantage of saving programs now.
How Much is Enough?
Most planners recommend as a general rule to plan for 80 percent of your pre-retirement annual working income to fund your retirement costs. This should provide a similar standard of living, assuming three things: that you’ll not be paying payroll taxes or contributing to a pension, that your mortgage is paid off, and that your commuting, clothing, and food expenses will be lower. In planning for your own personal situation, you’ll want to factor in the following:
- Is the mortgage paid off?
- Are you helping adult children pay for college?
- Do you own your cars or have auto loans or lease payments?
- Do you have high credit card balances or are your cards paid off?
- What is the cost of living where you plan to retire, and can you afford it after you stop working?
- Can you build a cushion for in-home medical, home aid, or chores such as lawn mowing and snow removal, should you need help?
Vanguard’s website provides an income calculator that allows you to plug in your current age, estimated age at retirement, current income, and any investment income you expect to receive at retirement age. It also lets you select the age you’d like to retire, in order to calculate the numbers.
SmartAsset.com’s calculator helps you factor current income, current savings and retirement age, well as ballpark Social Security payments to get a sense of how much money you’ll need to retire and when you can expect to stop working full time. You can even adjust the year to see the financial impact, and include your current hometown and state of residence. SmartAsset adjusts numbers for inflation, and you can start with how much money you think you’ll need per year to support retirement.
The United States Social Security Administration also provides an online tool to estimate your projected Social Security benefit and prepare for retirement.
An Example: 60-Year-Old Jane
Here’s a fictional example we created and calculated with SmartAsset.com’s tool, for context:
Jane, who just turned 60, currently earns $75,000 a year at a job from which she plans to retire. She estimates she’ll need $60,000 a year (80 percent) in annual retirement income.
Jane is single with no children and owns her home. She’s in good health and expects to stay in her home.
Jane has $100,000 today in her 401K and another $10,000 in personal bank IRA account savings, which will continue to grow. She has no Roth IRA savings and no pension plan.
The SmartAsset calculator recommends that Jane save $1,710 per month, and she’ll need an additional $409,739 (total) to retire by age 70.
Based on Jane’s current savings accounts and anticipated social security benefits, SmartAsset estimates she’ll need $65,887 per year of post-tax retirement income at the age of 70 to fund her retirement.
The calculator does not factor in how long Jane will live in retirement, and it doesn’t plan for any catastrophic expenses.
Let’s break SmartAsset’s analysis down:
Jane can expect:
- About $12,822 in annual 401K disbursements
- $901 per year in IRA withdrawals
- $9,262 annually from cash savings and investments
- $42,902 per year from Social Security
Keep in mind that online calculators are a great place to begin and to get a sense of how you’re doing, but don’t consider those numbers set in stone because they don’t take into account your evolving needs.
And online tools are no substitute for a sit-down session with a professional financial advisor. Everyone’s situation, finances, and needs are unique. A financial advisor can help you build a retirement plan in line with your goals, aspirations, and your wallet, as well as help you align what’s realistic to expect from your money and what’s not.
Now Get to Work
Now that you have an idea of what you’ll need, it’s time to get into the nitty-gritty.
Take a deep breath and gather your financial records and write down your assets — liquid as well as long-term savings and debts. You’ll need this information for any worthwhile appointment with a financial advisor anyway, and having the information altogether is a great way to see the bigger picture with open eyes.
Include any long term investments, stocks, bonds, certificates of deposits, IRA and 401K accounts etc. While long term investments aren’t liquid, they form the backbone of your retirement portfolio and are an important part of your asset list.
Create an inventory of your expenses along with dates you expect them to be paid off. A retirement plan should be created in keeping with your spending, consumption, and habits in mind.
Talk to a tax accountant. While you won’t be paying zero taxes, your tax rate should significantly drop once you stop working full-time. Understanding the impact of that, as well as any tax credits you might be eligible for, should factor into the financial picture. Check with an accountant or tax professional to see what applies to you.
What to Do If You’re Nearing Retirement but Not Near 80%
Don’t panic if you’re nowhere near the 80 percent savings rule of thumb. Taking 80 percent of your current income as set-in-stone and not doing the homework to determine if that’s a good target for you will only cause sleepless nights.
Armed with your pen and paper (or iPad if you prefer), write out your retirement goals and aspirations, along with your anticipated expenses in retirement. That will help you navigate calculators with better numbers and avoid some serious knee-jerk panic.
Another way to estimate retirement income is to subtract taxes paid from gross income, or your after-tax (net) income. If you’re spending roughly your after-tax income, that’s a safe estimate for the income amount you’ll need in retirement.
- If you’re spending more than your after-tax income to live on, then it won’t help you estimate what you’ll need.
- If retirement is a land far, far away for you (you’re young, congrats!), then you’ll need to adjust for your working years and estimated salary increases and inflation. You’ll also need to take into account your expected spending.
If You’re Discouraged
If you’re feeling by now that you’ll never be able to retire, take heart. According to a recent Forbes report, every day a staggering 10,000 Baby Boomers turn 65. (The Baby Boom Generation is typically considered to be those born between 1946 and 1964, roughly 20 percent of the American population.)
Yet for many of those turning 65, the thought of retiring either keeps them up at night, or they dismiss it as something they won’t (or worse, can’t) ever afford to do.
If you’re 50 or over and have little or no savings, retirement is within your reach. But you’ll have to face the facts and make a fast-track plan along with contingencies. You have several options:
- Work longer. Financial guru Suze Orman and the Stanford Center on Longevity agree that 70 is the new retirement age. It may be necessary to work a little longer than you’d originally planned.
- Consider downsizing or paying off your home mortgage, if it makes sense to age in place. Interest adds up over time, and can make a serious dent in your finances.
- Work now to clear debt and try scaling back expenses before it becomes a necessity. In fact, you can save that extra money to get a sense of how it feels not to have it and grow some savings in the bargain.
- Pay yourself first. Set aside a savings percentage amount, weekly or monthly, and make that deposit before paying any other bills. Take your savings off the top and watch it grow.
- Consider a part-time job, consulting, or freelancing in your field after full-time retirement to supplement savings or investments and Social Security benefit payments.
- If you’re able, pick up a part time job now and save that money toward retirement. Be diligent and set long-term financial goals. Make those dollars off-limits, except for real emergencies like a collapsed roof or necessary medical expenses.
Although the future, by nature, is filled with uncertainty, you can create a plan that will give you peace of mind that you’ll be ready for whatever it brings. Even if you’ve waited longer than you wish you had, there’s a lot you can do beginning today. It’s possible to face your future with confidence.
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