To answer the question, “How much do I need to retire?”, we need to answer the following set of questions below.
In this article:
- How Much Money Do I Need to Retire?
- How Much Do I Need to Earn to Retire?
- How Can You Get on Track for Retirement?
How Much Do I Need to Retire Comfortably? | Retirement Readiness
It’s always the right time to think about your retirement. Whether you’re starting early or just beginning, it’s possible to calculate the exact amount of money you’re going to need to maintain your quality of life.
Here’s everything you need to know about saving your retirement money.
How Much Money Do I Need to Retire?
Figuring out your retirement plan begins by determining how much you’re going to need support yourself each year. Conventionally, your post-retirement funds are approximately 80% of your current salary—but a lot of this depends on the lifestyle you want after you retire.
In practice, many people find that their post-retirement annual salary is about 120% of their current salary.
If you currently make $60,000 and you plan on retiring when you are 65, you may need 30 years of a $48,000 salary. That’s $1,440,000—and while you may plan on some of it coming from Social Security, you should note that the availability of Social Security in the years ahead (and for how much) depends on the future political and economic situation.
Most people should not rely on Social Security for their retirement. Your projected salary doesn’t include any incidental costs, such as medical bills that you might incur, or future long-term health care costs.
These expenses are what can drive up your retirement needs beyond the traditional 80%. Further, not everyone needs 80% of their salary. If you invest in a home before you retire and pay it off completely, for example, you won’t have any large housing expenses.
How Much Do I Need to Earn to Retire?
Once you know how much you need to retire, you need to calculate how much you should set aside every month. This usually requires a retirement calculator tool, because of compounding interest.
The earlier you start saving, the more interest you’ll gain on your principle. You’ll also be gaining interest on the interest.
If you are currently 35 years old, your income is $60,000, and you currently have $30,000 in savings, then you’ll need to save about $1,000 to $1,200 a month in order to be on track for your retirement.
However, everyone’s numbers are a little different. Delaying your retirement age can have a substantial impact, as can saving more when you’re younger. If you started when you were 25 — even with no savings at all — you would only need to save around $700 to $800 a month.
Understandably, this is a considerable amount for many people. The amount that most people need to save to retire comfortably usually falls between 20% to 25% of their current salary if they are starting later in life (in their 30s) or about 10% to 15% of their current salary if they are starting in their 20s.
Starting earlier improves the amount that you need to save over the course of your working life.
It’s worth noting that most retirement accounts are tax-advantaged, so most money put into a retirement account is worth more than it would be if it was otherwise spent.
Retirement accounts are also influenced by factors such as the stock market. These numbers all assume a 6% average return, which is normal historically but may not be in the future.
How Can You Get on Track for Retirement?
If you aren’t already saving for retirement, it’s important to start now. Here are some tips for improving your retirement savings:
- Begin investing in an IRA or a self-directed IRA. An IRA lets you save money pre-tax, so you are effectively saving not just the money you put in, but the percentage you would ordinarily pay to the government.
- For employer-sponsored plans, such as a 401(k), find out your employer match. Many employers will match your own retirement investment up to a certain percentage of your salary. If you make $5,000 a month and your employer matches 5%, then you can put a free $250 into your retirement account every month by putting in at least $250 yourself.
- Look into ways to generate passive income. Rental income—and generally owning real property—is often considered to be a way to boost your post-retirement lifestyle.
- Consult with an investment professional. A financial professional will be able to review your current situation to find ways in which you can boost your retirement.
- Consider reducing your expenditures. If you can reduce the amount of money you’re spending in your retirement, you don’t need to save as much. Planning to move to a less expensive area is a popular way to achieve this.
Many people aren’t presently on track for their retirement, but they can be with some work. Investing in an IRA or a self-directed IRA is often the first step, as it allows you to start saving money immediately in a tax-advantaged way.
Have you started setting aside money for your retirement? Tell us how you went about it in the comments section.
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