Everyone needs a solid retirement plan. One of the most important questions to ask yourself is, “How much do I need for retirement?” The answer to this question changes the whole dynamic of your spending. It will dictate the types of savings and retirement accounts you will have, as well as your retirement goals. It can even inform you of whether you have a chance to retire early – and retire comfortably. To help you find your answer, read the following information below.
How Much Do I Need for Retirement? | Calculate Your Needs Here
In This Article:
Understanding Your Expected Benefits
One of the first things to look at to figure out how much you need for retirement are your potential benefits.
How much can you expect to receive from Social Security, pensions, and annuities? What will be your annual income from this point on until you retire?
If you are decades away from retiring, it may be hard to guess whether you will be working until 66 or 67, but it does not mean you can postpone planning for retirement years. In fact, now is the best time to decide if early retirement is a serious goal. It may entail some lifestyle sacrifices, but the savings and growth from an investment option can also be huge.
Your current salary may also increase over the years. It may make estimating your future monthly income from Social Security, 401(k) contributions, and pensions difficult to calculate.
To help you, look for online calculators that make statistical adjustments for you, such as predicted inflation and average salary increase percentages.
Before you begin drawing on your retirement income, you will also have to decide how much you want to receive from your benefits, such as Social Security, regularly. Of course you hope to receive 100% of your benefits, but the amount your spouse will receive may be affected in the event of your death. The lower the amount of monthly income, the greater the post-death monthly income will be for your surviving spouse.
With all these factors in mind, you may already have an idea of how much you need during your retirement years. What you need to do next is to know what adjustments to make to reach your objectives and remove the gap between retirement income and your expected out-of-pocket expenses.
The Traditional Calculator
“How much do I need for retirement?” As a rule of thumb, many experts advise you will need at least 70% of your pre-retirement income. It means a combination of savings, Social Security, and pensions should total 70% to 90% of what you currently make.
You can calculate this with yearly or monthly figures. Because Social Security calculators often give you the monthly income, using a monthly projection for expenses may be more helpful.
For example, if you currently gross about $5,000 a month, conventional wisdom says your savings plus monthly retirement income must be at least $3,500.
If you and your partner are working and are the same age, start with 70% of your current combined pre-retirement income. Then calculate your estimated combined Social Security and pension benefits. The difference between those benefits and your projected income needs will determine your ideal monthly savings.
If there is an age gap between you and your spouse, the calculations will have to be done in stages. The younger spouse’s current income is a factor. Even if he or she is not currently working, knowing what his or her Social Security benefit will be down the road should be included in the equation.
The Expense-Based Calculator
The traditional calculator may not apply to you because it assumes your needs and expenses will not change. What you are earning now may be geared to a lifestyle you do not expect to have once you retire.
You may need more money if you plan to travel in style or build a second home. Income needs increase further when you require quality long-term care insurance.
On the other hand, the spending may be less if you have already completed your mortgage or no longer have to pay for college tuition when you reach retirement age. You may also receive more money if you decide to work part-time.
Another way to answer “How much do I need for retirement?” is to use the expense-based calculation method.
Start with the bills you currently have and expect to have after retirement. These may be cell phone bills, utilities, and long-term loan repayments. If you expect to pay the same mortgage or rent well into retirement, include that.
Add in potential expenses for new things. These can be more frequent travel, club memberships, retirement homes, etc.
Diverting Income into Savings
You can also know the difference between your expected monthly retirement income and your retirement expenses, which should tell you your savings goal.
Assume your life expectancy is at least 90. (It is usually the assumed age of financial planners to potential retirees with no serious health conditions.) You can calculate the total amount of savings you will need by multiplying the income gap by the number of months between retirement and age 90.
Finally, calculate how much you should save each month to achieve that based on your years until retirement. Put as much of that amount as possible away monthly by diverting a certain percentage of your paycheck. (If your company has a retirement savings plan, the bite out of your paycheck will be less because you will be using pretax dollars.)
Can’t swing that entire amount? Consider making a low-risk investment strategy. Your company’s retirement savings plan may have options.
What if you are self-employed or working in a company that does not have 401(k) or other savings plans? Talk to a reputable financial planner about ways to make your savings grow. They can present investment portfolios that can help you achieve a comfortable retirement.
What if the Numbers Still Look Bleak?
The question “How much do I need for retirement?” becomes even more important if you are nearing your retirement age and do not have enough savings. It may feel you are already out of time.
Do not panic! The key is deciding how much you are willing to downsize.
Where you live is likely to be a key factor. If your house is paid off and your other expenses are minimal, you may be able to get by without any Social Security or pension funds. If your projected high rent or mortgage is keeping you up at night, however, consider downsizing.
Can you get by with a smaller apartment with a modest rent? Can you perhaps move to another part of the country where the cost of living is much lower?
If you do decide to move, look for a place that is near a bus line or is in comfortable walking or biking distance from shopping. If you are physically able to do so, giving up a car can save you hundreds of dollars each month on car payments and gas.
Once you retire, you may find many of your expenses also dwindle. In addition, you may have time to make the things you need rather than buy them. If you have a backyard, consider growing some of your food.
Even small changes, such as turning leftovers into casseroles and stews, can really add up to big savings. For people who relish self-sufficiency, hanging laundry on a line and making their own clothes are major cost savers.
There is also no better time to meet with a retirement planner. They can help you structure any future 401(k) or IRA withdrawals to decrease the tax hit. They will also look at any current investments. Often, pivoting from high-cost funds is the best way to draw on the income from these investments and reduce fees.
As retirement nears, identify retirement-age deadlines that have penalties if missed. These include signing up for Medicare. You also get penalties for drawing on Social Security early. The longer you can put it off past the technically eligible age of 62, the higher the return can be.
If you can make it to your official retirement age (66 or 67 for most people), you are eligible for 100% of your benefit. You will get even more past that until the age of 70.
Healthcare is obviously a major expense in the later years. You may find purchasing a supplemental Medicare plan can help cover prescriptions. Each year, you will also have the opportunity to shop for Medicare D, potentially lowering your healthcare costs.
It is not uncommon for people to feel a little overwhelmed when they ask, “How much do I need for retirement?” Take some time to get over your panic and then regroup. Decide whether there are any changes you can make to your lifestyle now that will reduce expense and help you save for retirement. Try to look at these challenges as an opportunity for new adventures. When in doubt, do not forget a financial advisor can often have ideas you never even considered.
Have you asked, “How much do I need for retirement?” What are your strategies to reach your goals? Let us know below.