How much do I need to retire?

This answer may vary based on your age, location, investments, and pre-retirement income. However, research published by Schwab Retirement Plan Services in 2019 illustrates two things. First, 401k participants believe they need $1.7 million, on average, to retire. Second, many are not on track to get there. 

 

Are you on track to retire? Let’s find out…

 

# 1: How much do you intend to spend?

What are your expectations for retirement? Do you plan on living the same lifestyle? Would you like to travel more? Live modestly? This is the most important factor in determining how much money you will need to support your desired quality of life. 

 

Studies show a majority of people want to maintain their comfortable lifestyle after leaving the workforce. Generally, you need 80% of your pre-retirement income to cover your cost of living in retirement.  

 

Example: Married couple Jack and Jill are 65 and decided they would like to retire in 2 years. Their current household income is $150,000/yr. To continue living the same lifestyle pre-retirement, they need $120,000 per year, $10,000 per month.   

 

#2: Do you have other sources of income?

Another factor to consider is reliable sources of income such as social security, annuities, pensions, and part-time work. Social Security replaces about 40% of the average American’s pre-retirement income all by itself. This percentage is typically lower for higher-income retirees, but for most people, SS is a significant income source. If you’re not sure how much to expect, check your latest Social Security statement or go to SSA.gov to get an estimate based on your work history. 

 

Example: Jack and Jill need $10,000 per month to maintain their lifestyle. This amount can be adjusted depending on additional sources of reliable income. 

 

Jack and Jill anticipate $2,200 in Social Security benefits and a $1,800 monthly pension. This means $4,000 of the $10,000 needed will be taken care of by other income sources other than their savings. 

 

$10,000 – $4,000 

Monthly Income required = $6,000

 

Use this formula to estimate your monthly income required:

 

Estimated monthly retirement expenses – Monthly retirement income from other sources of income = Monthly Income Required 

 

#3: How much do you need to save?

After determining how much income you will need to generate from your savings, the next step is to calculate how large your nest egg needs to be to produce this much income. 

 

Start with the 4% rule! In your first year of retirement, you can withdraw 4% of your retirement savings. For example, if you have $1 million saved, you can withdraw $40,000 in the first year of retirement. In subsequent years of retirement, you would adjust this amount upward to keep up with cost-of-living increases. The idea is if you follow this rule, you will not have to worry about running out of money in retirement. Specifically, the 4% rule is designed to make sure your money has a high probability of lasting for a minimum of 30 years.

 

 

Example: Jack and Jill have a combined balance of $1.2 million in their 401k. If they withdraw 4% the first year, this will generate $4,000 per month, $48,000 per year.

 

In summary, Jack and Jill need $120,000 a year in required retirement income. Their SS benefits and pension will take care of $48,000. By using the 4% rule, they can also distribute $48,000 from their $1.2 nest egg in the first year. However, they are still $24,000 short of $120,000/yr.

 

We predict Jack and Jill will need $1.8 million, including their SS benefits and pension fund, to maintain their current lifestyle in retirement. 

 

#4: How much will you earn on your savings?

Time is a very important factor when saving for retirement. Small amounts invested early in your career can grow substantially. Realistically many individuals can’t afford to set aside 15% of their income for retirement. However, don’t let that number discourage you, putting aside any amount for retirement positions you to benefit from compounding as soon as possible!

 

Example:

Investor A: starts investing $100 a month at 25 years old. By age 65, they would have a retirement balance greater than $640,000, assuming annual returns of 10% which is the average return of the S&P 500 over the long term

 

Investor B: waited until 35 to start saving but invested $200 a month. They would have almost $200,000 less in their retirement balance by age 65, despite contributing $25,000 more. 

 

A difference in just ten years can drastically impact potential returns earned by your investments.

 

#5: Bottom Line 

The bottom line, there isn’t one perfect method for calculating retirement savings targets. There are many factors to consider when coming up with your own target such as investment performance, inflation, time, location, personal goals, etc. With our advanced technology and extensive research, our team is able to identify hundreds of these factors, to create a personalized plan just for you. Ask us about the Starfox Planning Tool or  create a plan of your own by filling out the planning questionnaire above.  

 

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