The First Step When Calculating How Much Youll Need Is Estimating Your Future Expenses In Retirement
There are many rules of thumb out there when it comes to retirement. You may have heard that you should be saving 10-15 per cent of your pre-tax income, or that youll need around 70 per cent of your income when you stop working.
In our example, Joe Supersaver ends up with an amount equal to almost all of his pre-retirement earnings by saving 18 per cent of his earnings.
Joe the Supersaver is going to be fine, Engen said. Thats true especially given that he will no longer have to set aside over $7,000 a year for retirement, which will significantly boost his disposable income. Instead of maximizing his RRSP contribution, post-retirement Joe Supersaver will likely have room to save up for routine big-ticket expenses like a new car or roof, and, maybe, a few vacations.
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Ordinary Joe, on the other hand, will likely be on pretty thin ice. Not having to save for retirement will free up a little over $300 a month in his cash flow compared to when he was working. Thats not much of a cushion to deal with unexpected costs, Engen said.
The 70 per cent income-replacement ratio doesnt work well for someone with a relatively low income like Joe. For others, though, that may be plenty, especially at higher income levels.
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S To Retiring Comfortably
Saving Vs Investing For Retirement
If you are only saving your money in a bank account, its going to be very difficult for you to hit your retirement goals. Most of the major banks have very low-interest rates well below 0.5%, which wont even keep pace with inflation. With online High-Interest Savings Accounts like EQ Bank, you can get a better interest rate of 1.50%.
Compare this to if you invest in the stock market. The U.S S& P 500 index returned 12.1% on average for the 40 years ended on December 31, 2019 , and the TSX index returned 8.8% on average for the same period.
For a long-term estimate of the TSX and S& P 500 going forward, I would conservatively forecast a 5-7% return, which should still be well above a simple savings account.
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Spending From Your Assets
To close the gap between the income you need and the income you have, youll need to spend from your assets.
Live Off the Earnings?
Some people imagine retirement as a time when they live off the income from their savings. But for most people, thats not a reality. Especially if you plan to retire with $500k in assets, you , will probably need to spend down your assets. Thats because interest rates are relatively low, and most retirees prefer to avoid taking major risks with their life savings.
To save enough to avoid spending from your principal, you might need to continue working longerwhich isnt always an option. The other option is to save so much of your income that its hard to enjoy yourself and make memories during your working years. Thats probably not very appealing, either.
A Safe Withdrawal Rate?
Its critical to make your money last. You dont want to run out of savings before you die, as youd need to make unwelcome sacrifices at a time in life when youre vulnerable. So, how much is safe to spend? One rule of thumb suggests that you can spend 4% of your savings per year. The success of that strategy depends on several factors , and the topic is constantly debated. Still, the 4% rule can be helpful as a starting point for learning where you stand.
Tip: If you want to be safe, use a lower number, such as 3%. Recent studies suggested a 3.3% rate might be appropriate when interest rates are low and markets are near all-time highs.
Percentage Of Your Salary
To begin to figure out how much you need to accumulate at various stages of your life, it can be useful to think in terms of saving a percentage of your salary.
Fidelity Investments suggests saving 15% of your gross salary starting in your 20s and lasting throughout the course of your working life. This includes savings across different retirement accounts and any employer contributions if you have access to a 401 or another employer-sponsored plan.
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How Much Does A Couple Need To Retire
Much like an individual, how much a couple needs to save to retire comfortably will depend on their current annual income and the lifestyle they want to live when they retire. Many experts maintain that retirement income should be about 80% of a couples final pre-retirement annual earnings. Fidelity Investments recommends that you should save 10 times your annual income by age 67.
Choose A Withdrawal Rate Based On Your Time Horizon Allocation And Confidence Level
CSIA updates its return estimates annually, and withdrawal rates are updated accordingly. See the disclosures below for a summary of the Conservative, Moderately Conservative, Moderate, and Moderately Aggressive asset allocations. The Moderately Aggressive allocation is not our suggested asset allocation for any of the time horizons we use in the example. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product and the example does not reflect the effects of taxes or fees. Past performance is no guarantee of future results.
Again, these spending rates assume that you will follow that spending rule throughout the rest of your retirement and not make future changes in your spending plan. In reality, we suggest you review your spending rate at least annually.
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States With The Highest Retirement Income
1. Hawaii
The average annual retirement income in Hawaii is $119,004 to live comfortably. Hawaiis average retirement age is on the older side at 66 years however, it has the highest life expectancy of any U.S. state at 81.50 years. To live comfortably in this period, one would need to save $1.84 million before retiring.
2. District of Columbia
The average retirement income in D.C. is $100,419. The District has the oldest average retirement age in 67 years and a life expectancy of 77.10 years. With yearly expenses coming out to about $83,683, a person would need to save about $1.01 million to retire comfortably in the District of Columbia.
3. California
California has the third-highest average income required for a comfortable retirement. Because Californias average retirement age of 64 years is lower than D.C. and its average life expectancy is higher at 80.90 years, the total amount of savings required to live comfortably is $1.46 million, higher than D.C.s. However, because average yearly expenses are lower, the average annual income to live comfortably is lower at $86,171 per year.
4. New York
The average income required to retire comfortably in New York is $83,817 per year. Retirement in New York is expected to last just over 16 years, with an average retirement age of 64 years and an average life expectancy of 80.80 years. For these 16 years of retirement in New York, the average retiree needs to save $1.41 million, the second-highest among states.
5. Massachusetts
What You Should Do Next For Your Retirement Savings
Retirement is approaching a crisis. In the coming decades, millions of Americans will get too old to continue working without the means to stop. Millennials, crippled by debt from graduation, will turn this crisis into a catastrophe in about 40 years. And Social Security, designed to prevent exactly this problem, covers less than half of an average retiree’s costs of living.
It’s beyond the scope of this article to discuss exactly how this happened, but if you’re one of the many people who have fallen behind on retirement savings, don’t panic. There’s plenty you can do. But it might not necessarily be easy.
The key is to think about retirement savings like a debt. This is money you owe to yourself and it charges reverse interest. Every day you go without adding money to your retirement account is a day you lose investment income. That’s money that you’ll need someday and won’t have.
Next, take stock of where you are. How much will you want to live on in retirement and how much do you have saved today? Use our chart above. That will tell you how far behind you are compared to where you need to be. Are you a 40 year old with $25,000 in savings who will want to live on $50,000 per year in retirement? Then you’ve got $75,000 you need to make up for.
It won’t necessarily be fun. You might have to cut back on luxuries or take on some extra work, but even if you start late in life you can catch up on your retirement.
Now’s the right time to start.
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Factor In Other Forms Of Retirement Income
In addition to your liquid savings, there are other forms of retirement income that can shield you from market ups and downs and protect your nest egg. While pensions are less common today than with previous generations, they do provide a regular benefit. If youâre concerned about outliving your savings, an income annuity can be a good option, as youâll receive a monthly payout for the rest of your life. A whole life insurance policy, which has accumulated value that’s guaranteed to grow and is not tied to the market, can be another way to supplement your income.
Youâll also want to factor when you plan to start taking Social Security. While you’re eligible to begin collecting at age 62, waiting can mean receiving a larger benefit each month. But doing so will also require that you have enough income to support yourself until then. A financial advisor can help you decide when it makes the most sense for you to take Social Security.
Schwab’s Suggested Allocations And Withdrawal Rate
- Planning time horizon
- Planning time horizon
- 3.4% to 4.1%
- 4.9% to 5.4%
- 9.6% to 9.9%
-
Schwab Center for Financial Research. Initial withdrawal rates are based on scenario analysis using CSIA’s 2022 10-year long-term return estimates. They are updated annually, based on interest rates and other factors, and withdrawal rates are updated accordingly.1 Moderately aggressive removed as it is generally not recommended for a 30-year time period. The example is provided for illustrative purposes.
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Figures Increase For Married Couples
Being a couple has some unexpected advantages. For instance, the average retirement income for a couple can be more than double the average retirement income for a single person. Yes the amount is higher, even when accounting for the presence of two single incomes instead of one.
According to the U.S. Census, the average income for a household headed by a married couple aged 65 or over was nearly $105,000 in 2019. The median income for these households was nearly $75,000.
It’s worth noting that some statisticians say the median is a better and more representative number when evaluating income levels. Census figures show that the median income for a woman aged 65 or older living alone was slightly more than $24,000 in 2019. The average income for that group was about $35,600. For single men in that age group, the median was about $31,000, while the average was a little more than $64,000.
| Ages 65 and Older | |
|---|---|
| $104,663 | $74,659 |
The average retirement income for a couple, according to these figures, is higher than the amount you get when you add the average income for a single man with the average for a single woman in the same age group. This is especially apparent when adding together the more useful median incomes of single men and single women, which equals $55,148 or roughly $19,500 less than the median income for a married couple household.
How Much Savings Do Retirees Have
Despite increases to retirement savings contributions, most households do not have sufficient retirement savings. According to the National Institute on Retirement Security, based on 401 and IRA account balances, 92 percent of working households fall short of retirement savings targets for their age and income.
401 accounts are the most common retirement savings account that the majority of retirees rely on for retirement income. Below is a table breaking down the average 401 account balance by age group in 2019.
| Age Group |
| $195,500 |
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How Much Do I Need To Retire At Age 55
This single woman has been doing all the right things, and it shows in her retirement preparedness. Shes 50 years old, and she can reasonably expect to retire at age 55 with all of her financial needs met. Her savings risks are reasonable, and she saves a moderate amount of her income. But because she has been saving consistently for years, she has built a nest egg that will last.
Here are her statistics:
- Lifetime annuity payout: $1,600 monthly with COLA
- Amount added to savings each month: $1,000
- Percentage of savings in stocks: 25%
- Other debt: $14,000
Between tax-deferred savings, stocks, and other savings, shes already tucked away over $500,000, which is nearly double the amount shes projected to need to retire in five years. Add to that her lifetime annuity of $1,600 monthly, which has a cost of living adjustment , and her plan is so solid, her savings is projected to last until she is 90 to 120 years-old.
She should only need about $220,000 to live a comfortable life for many years to come. And if she elects to add Medicare Supplemental Insurance, she may retire early, at 55, and sail on through without any concerns about unexpected health care costs later.
- Projected amount needed to retire at age 55: $220,000
Still Starting To Save Early Pays Off
In both scenarios, Joe starts saving at age 25, which is a very good start, Engen said, even with a saving rate of 10 per cent. For simplicity, our scenarios assume Joes earning stays constant. In real life, your income will probably go up as you advance in your career, giving you an opportunity to bump up the amount you squirrel away every month. If you start saving at 40, its harder to catch up.
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How Long Do You Want To Plan For
Obviously you don’t know exactly how long you’ll live, and it’s not a question that many people want to ponder too deeply. But to get a general idea, you should carefully consider your health and life expectancy, using data from the Social Security Administration and your family history. Also consider your tolerance for managing the risk of outliving your assets, access to other resources if you draw down your portfolio , and other factors. This online calculator can help you determine your planning horizon.
Will You Make Changes If Conditions Change
This is the most important issue, and one that trumps all of the issues above. The 4% rule, as we mentioned, is a rigid guideline, which assumes you won’t change spending, change your investments, or make adjustments as conditions change. You aren’t a math formula, and neither is your retirement spending. If you make simple changes during a down market, like lowering your spending on a vacation or reducing or cutting expenses you don’t need, you can increase the likelihood that your money will last.
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So How Much Do You Need To Retire By Age 65
Some organizations, including AARP, recommend saving between $1.2 and $1.5 million to support a 30-year retirement, and if you are hoping for a magic formula or number, there isnt one. And thats because everyone has different retirement goals.
Here however are some ways to predict how much money you will need to retire by age 65.
How Much You Should Be Saving For Retirement By Age
According to a study by the National Institute on Retirement Security in the US, 66% of working millennials have no retirement savings. Letâs change that.
If at age 20, you invest $400 per month and earn 8% in the stock market on average per year, youâll have $2 million at age 65. If you start at 35, youâll have $587,000 at age 65. Invest tip: start early. Putting money into a savings account is not investing, itâs actually the opposite because inflation will likely devalue your buying power.
With that in mind, another way to look at this is your savings rate, in other words, the percentage of money from your paycheque you can put towards investing. The higher your savings rate, the fewer working years until retirement. In theory, the way you spend will be about the same in retirement as it is today.
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Yes $500k Might Be Enough
The short answer is yes$500,000 is sufficient for some retirees. The question is how that will work out. With an income source like Social Security, relatively low spending, and a bit of good luck, this is feasible. And when you have two people in your household receiving Social Security or pension income, its even easier.
Clearly, more money provides more security and more options. But when youre ready to stop working, its smart to run some numbers and see what your options are. And an important first step is to understand roughly how much you need to spend each year. Then, you can figure out if you have the resources to support that spending.
Lets walk through an example of exactly how it works.
Keep reading below, or listen to an explanation by video:
