How Much Monthly Income Will You Need In Retirement
Whether youre just a few years away or two decades from retirement, now is a good time to think about your retirement goals. How much money will you need to travel, participate in leisure activities, or to simply maintain your lifestyle?
Determining the amount of income youll need in retirement is one of the most important parts of the planning process. But the amount needed is different for everyone and depends on factors like your retirement lifestyle, where you’ll live, and how healthy you’ll be as you age. And then theres the biggest unknown: how long you will live.
While theres no magic formula to determine the exact amount of income youll need, there are some questions you should ask yourself and some calculations you can do to be sure you have the income you need in retirement.
Are Your Retirement Savings On Track
Adjusting for income as well as age matters because two people who are the same age can have different incomes. And Social Security benefits differ, depending on your earnings over the years. The higher your annual earnings before you retire, the smaller your benefits will be relative to your preretirement earnings.
For example, if your preretirement household annual income was $50,000, Social Security benefits will now replace about 66%, according to J.P. Morgan.
If your preretirement income was $250,000 a year, Social Security will replace only 20% of it.
What if you’re not on track to save the right amount for retirement? This IBD report describes practical money-saving tips each can save you $10,000 a year. You can shift that money into your retirement savings. Another IBD report explains additional tips, each of which can save you $500 or more.
How Do Benefits Work And How Can I Qualify
While you work, you pay Social Security taxes. This tax money goes into a trust fund that pays benefits to:
- Those who are currently retired
- To people with disabilities
- To the surviving spouses and children of workers who have died
Each year you work, youll get credits to help you become eligible for benefits when its time for you to retire. Find all the benefits Social Security Administration offers.
There are four main types of benefits that the SSA offers:
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How Much Money Do You Need To Retire
A common guideline is that you should aim to replace 70% of your annual pre-retirement income. This is what the calculator uses as a default. You can replace your pre-retirement income using a combination of savings, investments, Social Security and any other income sources . The Social Security Administration website has a number of calculators to help you estimate your benefits.
It’s important to consider how your expenses will change in retirement. Some, like health care and travel, are likely to increase. But many recurring expenditures could go down: You no longer need to dedicate a portion of your income to saving for retirement. You may have paid off your mortgage and other loans. And your taxes are likely to be lower payroll taxes, which are taken out of each paycheck, will be eliminated completely.
Be sure to adjust based on your retirement plans. If you know you wont have a mortgage, for instance, maybe you plan to replace only 60%. If you want to travel every year, you might aim to replace 100% or even 110% of pre-retirement income.
Retirement Savings Goals By Age Income
How do you know if you have enough retirement savings so far? And what exactly does “enough” retirement savings mean? It means your savings are big enough to have at least an 80% chance of lasting 35 years after you retire at 65, says J.P. Morgan Asset Management, which crunched the numbers.
“Twenty percent of the time something bad happens like a severe stock market downturn, said Katherine Roy, chief retirement strategist for J.P. Morgan Asset Management. “Then you would need to course correct. You can do that by taking steps like boosting your savings rate or cutting your retirement spending. That way, you avoid running out of money in the long run. But 80% of the time, you would not need to make any changes to avoid running out of money.”
J.P. Morgan also assumes that you invest your savings 60% in diversified stocks and stock mutual funds plus 40% in diversified bonds and bond funds in the years before retirement.
After retirement, J.P. Morgan assumes your asset mix is 40% diversified stocks and 60% diversified bonds.
In addition, J.P. Morgan assumes that your:
- Nest egg averages 6.0% average annual growth over the long term post-retirement
- Age is 65 at retirement and that your spouse never worked and is 63
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Social Security Pensions And Other Reliable Income Sources
The good news is that, if you’re like most people, you’ll get some help from sources other than your savings, such as your Social Security benefits. For most people, Social Security is a significant income source.
But the percentage of income that Social Security will replace is typically lower for higher-income retirees. For example, Fidelity estimates that someone earning $50,000 per year can expect Social Security to replace 35% of their income. But someone earning $300,000 per year would have a Social Security income replacement rate of just 11% on average.
If you aren’t sure how much you can expect, check your latest Social Security statement, or create a my Social Security account to get a good estimate based on your work history.
If you have any pensions from current or former jobs, be sure to take those into consideration. The same goes for any other predictable and permanent sources of income. For example, if you bought an annuity that kicks in after you retire, or youre tapping your home equity through a reverse mortgage.
Continuing our example of a couple that needs $8,000 in monthly income to retire, let’s say each spouse is expecting $1,500 per month from Social Security, and that one spouse also has a $1,000 monthly pension.
This means that, of the $8,000 in monthly income needs, $4,000 will come from guaranteed income. The remaining $4,000 will need to come from sources such as investments and savings.
Do You Really Need 164 Times Your Salary To Retire
If 16.4 times your salary sounds like a lot of money, keep in mind that it’s only one of many estimates out there, and shouldn’t necessarily be treated as gospel. That said, it’s not a bad idea to aim for that target, especially if you have lofty goals for retirement. Having extra money on hand for your golden years is never a bad thing, so if you stick to this guideline and wind up with a surplus, you’ll buy yourself the opportunity to enjoy retirement even more than you originally imagined.
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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, including the clients I typically work with, 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.
To calculate your 4% amount for Year 1, multiply your retirement savings by 0.04 or use the tool below.
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.
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So How Much Income Do You Need
The reason you don’t need to replace 100% of your pre-retirement income is that, when you retire, you’re typically able to eliminate certain expenses. For example:
But retiring on 80% of your annual income isn’t perfect for everyone. You might want to adjust your goal based on the type of retirement lifestyle you plan to have and if your expenses will be significantly different.
For example, if you plan to travel frequently in retirement, you may want to aim for 90% to 100% of your pre-retirement income. On the other hand, if you plan to pay off your mortgage before you retire or downsize your living situation, you may be able to live comfortably on less than 80%.
Let’s say you consider yourself the typical retiree. Between you and your spouse, you currently have an annual income of $120,000. Based on the 80% principle, you can expect to need about $96,000 in annual income after you retire, which is $8,000 per month.
When You Plan To Retire
The age you plan to retire can have a big impact on the amount you need to save, and your milestones along the way. The longer you can postpone retirement, the lower your savings factor can be. That’s because delaying gives your savings a longer time to grow, you’ll have fewer years in retirement, and your Social Security benefit will be higher.
Consider some hypothetical examples . Max plans to delay retirement until age 70, so he will need to have saved 8x his final income to sustain his preretirement lifestyle. Amy wants to retire at age 67, so she will need to have saved 10x her preretirement income. John plans to retire at age 65, so he would need to have saved at least 12x his preretirement income.
Of course, you can’t always choose when you retirehealth and job availability may be out of your control. But one thing is clear: Working longer will make it easier to reach your savings goals.
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Schwab’s Suggested Allocations And Withdrawal Rate
- Planning time horizon
- Planning time horizon
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.
Isnt Your Financial Advisor Helping You With This
This is exactly what a fiduciary financial planner is forto figure this out with you . If youre paying somebody who only manages your money or sells you products, it may be time for a change. Reach out if youd like to talktheres no obligation, and we can just chat. I do not sell anything for a commission, I provide ongoing or one-time advice for clients, and I can work with people in Colorado and other states.
If you dont yet work with a financial advisor, consider the benefits of doing so. You can spend your time and energy on other things, and an experienced professional can help guide you through lifes inevitable changes. Plus, a study from Schwab Modern Wealth showed that having a plan can increase your retirement confidence and help you develop healthy financial behaviors:
- 56% of people with a written financial plan felt very confident about their goals
- Only 17% of respondents without a plan felt very confident
There are many ways to work with an advisor, and things may have changed since you last spoke to a financial planner. For example, its easier than ever to work with somebody for one-time financial planning or pay a flat fee for advice. Its understandable if youve had bad experiences in the past, and there are still plenty of advisors out there who are painful to work with, but things are changing.
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Start By Estimating Your Future Expenses
Pamela Rodriguez is a Certified Financial Planner®, Series 7 and 66 license holder, with 10 years of experience in Financial Planning and Retirement Planning. She is the founder and CEO of Fulfilled Finances LLC, the Social Security Presenter for AARP, and the Treasurer for the Financial Planning Association of NorCal.
A 2020 survey from Schwab Retirement Plan Services found the average 401 participant thinks they’ll need $1.9 million to retire, a 12% increase from the previous year’s survey. Of course, many people in the U.S. aren’t investing enough to reach that savings goaland the income it brings.
To find out if your retirement income will be enough, you have to start by estimating your retirement expenses.
Multiply Your Yearly Spending By 25
Okay. I might have thrown too much information at you. So, lets circle back and focus on a quick calculation.
Again, its generally agreed that you will need 70 to 85 percent of your pre-retirement income to maintain your standard of living after retirement. As a baseline, lets use 80 percent. Using this example, multiply your current household income by 0.80. Then divide that result by 12 to estimate your monthly income needs after retirement.
For simplicity, keep this amount as is, or adjust it higher or lower to suit your retirement goals. It may be necessary to plan on additional income if, after retirement, you plan to travel or pursue an expensive hobby.
Next, subtract your anticipated Social Security benefit and pension income. The amount left is the income you will need to generate each month from your savings, so multiply by 12 to determine how much to withdraw from these retirement income sources annually.
As a general rule, retirees can withdraw 4 percent of their savings in their first year of retirement, and this amount can increase based on price increases after that. To be fair and balanced, though, there are issues with the 4 percent rule.
For one, theres no guarantee the markets wont have downturns. Additionally, your asset allocation might differ from the 60-40 rule.
In spite of its shortcomings, this rule can be a valuable tool for estimating retirement readiness.
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How Much Retirement Income Will You Need
Nailing down the exact amount of retirement savings you’ll need is pretty much impossible. There are so many factors that will come together to determine how much retirement ultimately costs you, from your health to your lifestyle to the number of years you end up living. But if you aim to sock away 10 times your ending salary by the time you leave the workforce, you should, in theory, be in pretty good shape.
See, most folks need about 80% of their previous income to pay the bills in retirement. Of course, thrifty seniors might get by on a bit less, while those with lavish expectations will inevitably need more. Now, Social Security will provide some income in retirement . But even in a best-case scenario, your benefits will only replace about 40% of your former earnings, leaving you to cover the rest via savings.
So let’s run some numbers to see what it would mean for the average American to save 10 times his ending salary. Though we don’t have data on what the typical U.S. worker earns during his last year on the job, we do know that the median household income in the country is about $56,000 a year. Now again, this figure is tricky, because it doesn’t tell us what individuals are making on average . But it gives us a reasonable starting point.
Pensions 401s Individual Retirement Accounts And Other Savings Plans
401, 403, 457 Plan
In the U.S., two of the most popular ways to save for retirement include Employer Matching Programs such as the 401 and their offshoot, the 403 . 401s vary from company to company, but many employers offer a matching contribution up to a certain percentage of the gross income of the employee. For example, an employer may match up to 3% of an employee’s contribution to their 401 if this employee earned $60,000, the employer would contribute a maximum of $1,800 to the employee’s 401 that year. Only 6% of companies that offer 401s don’t make some sort of employer contribution. It is generally recommended to at least contribute the maximum amount that an employer will match.
Employer matching program contributions are made using pre-tax dollars. Funds are essentially allowed to grow tax-free until distributed. Only distributions are taxed as ordinary income in retirement, during which retirees most likely fall within a lower tax bracket. Please visit our 401K Calculator for more information about 401s.
IRA and Roth IRA
In the U.S., pension plans were a popular form of saving for retirement in the past, but they have since fallen out of favor, largely due to increasing longevity there are fewer workers for each retired person. However, they can still be found in the public sector or traditional corporations.
For more information about or to do calculations involving pensions, please visit the Pension Calculator.
Investments and CDs
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