How To Calculate How Much Youll Need To Retire
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A common rule of thumb is that if you want to leave the workforce at 60, you will need about 15 times the amount you have calculated for your annual after-tax retirement expenses. So if you estimate $60,000 per year, then you will need $900,000.
If you can wait until you are 65, you may only need 13 times the expenses, which will be $780,000. Remember, if you plan to leave a legacy to your children or have a holiday home, then you need to add those costs to this estimate.
If youre planning to leave the workforce soon, a good back-of-the-napkin estimate is to have a retirement portfolio thats roughly 25 times the value of your annual post-work income. Calculate this way: Consider how much money you want in your annual income during retirement. Then subtract any government benefits and any other guaranteed income, such as a pension, and then multiply by 25.
For example, if you need $120,000 per year during retirement and youll receive $30,000 from the pension, youll need roughly $2.25 million in savings.
Determine Your Retirement Age
Deciding when you should retire can feel like a balancing act. If you retire too early, you may run out of money. If you delay retirement, you could miss out on other experiences such as traveling or spending time with family.
Yet, delaying retirement comes with financial perks. First, your monthly Social Security benefits increase the longer you wait. The maximum benefit caps out at age 70.
If youre lagging behind on savings and investments, delaying retirement lets you earn more money and contribute to your accounts longer. It also gives your money more time to enjoy the effect of compounding interest.
Finally, retiring later creates a shorter window to depend on your savings, reducing your longevity risk.
But life doesnt always go according to plan.
A 2019 study by the Society of Actuaries found a persistent difference between expectations about retirement age and the reality.
People tend to retire much earlier than they plan to. According to the study which surveyed more than 2,300 people age 45 to 80 pre-retirees plan to retire at a median age of 65.
In contrast, actual retirees reported leaving the workforce at a median age of 60. That number has held steady since 2013.
Income, gender and marital status didnt greatly impact median retirement age, the study found.
In addition to health limitations, finding and keeping a job can become more difficult as you age.
How To Start Saving
To reach the above suggestions, Fidelity recommends that you save 15% of your income each year and that, over your lifetime, you invest more than 50% of your savings in stocks to get a higher return on your money.
If this seems like a lofty goal for your finances, you’re not alone.
According to a 2020 TD Ameritrade report, which surveyed 2,000 U.S. adults ages 40 to 79 with at least $25,000 in investable assets, nearly two-thirds of 40-somethings have less than $100,000 in retirement savings and 28% of those in their sixties have less than $50,000. Looking at a younger demographic, a 2019 TD Ameritrade survey found that 66% of millennials said they need to catch up on their retirement savings.
But anyone, no matter their age or amount in savings, can get started with the same principles. Thanks to compound interest, which means you earn interest on interest, it’s beneficial to start saving early even if it’s a small, regular contribution and let it build over years and decades.
It’s also important to balance short-term savings goals. Experts typically recommend having at least three to six months of living expenses in an emergency fund in case of job loss or an unexpected cost. Savings accounts provide a place to save your cash so that it’s easily accessible. An online high-yield savings account can help grow your money faster than a normal savings account would.
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Sudipto Basu Of Onecentatatimecom
Sudipto is the Founder of One Cent at a Time, where he blogs about personal finance and productivity. Hes an advocate of taking low-interest personal loans to pay off high-interest credit card balances to escape debt faster.
How much do you need for retirement and why?
I need at least $1 million to retire. My mortgage will be paid off by the time I retire 23 years from now. My sons college would by fully paid, too. So Ill have nothing else to pay for other than food, health, entertainment and travel for two peopleonly $24,000 in todays money.
Sudipto used the 4% rule on a $1 million retirement to come up with a withdrawal rate of $40,000 a year. He added,
I didnt factor in social security income because thats uncertain. Any income from Social Security will just be used for more travel and charity.
What conservative investment option can you recommend to a friend whos afraid of risk?
A CD ladder is the best option in my opinion. It has the least risk and its almost as good as annuities in terms of return. Id also recommend investing in bonds, as it has a lower risk compared to stocks and ETFs.
Want To Boost Your Score Here’s How
Here are some ways to boost your retirement readiness whether youre behind on your goals or are on track but maybe want to retire a little earlier.
“My score needs attention.”
An individual retirement account is one of the most popular ways to save for retirement given its large tax advantages. You can put in up to $6,000 a year. And if you’re 50 or older, you can contribute an additional $1,000 a year. » Learn more about IRAs
“On my way, but I could close the gap.”
The annual limit for 401 contributions is $20,500 in 2022 . Its wise to at least contribute up to the point where youre getting all of the matching dollars your employer might offer. » See about increasing your 401 contributions
“I’m on track, but I want to do more.”
A good advisor can help you understand complex issues, diagnose potential problems and take steps to plan for the future. And theyre not as expensive as you might think. » Learn how to choose a financial advisor
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Mike Scanlin Of Borntosellcom
Mike is the CEO of Born to Sell, but before that he worked in investment banking, venture capital, and software engineering.
How much do you need for retirement and why?
My retirement goal is $2 million because I expect to earn an 8% annual income through a combination of dividends and covered call writing
But hes not going to use the whole 8% for retirement. Mike adds, I will take out 5% a year and use the remaining 3% to pay withdrawal taxes or keep pace with inflation.
If youre curious about covered call writing, Investopedia defines it as the strategy of giving a buyer the option to buy your stock shares at a pre-determined price before the options expiration date.
What conservative investment option can you recommend to a friend whos afraid of risk?
Buy a diversified portfolio of blue chip, large capital, and dividend paying stocks. Then leverage them for monthly income using covered calls.
Life Expectancy And Retirement Income
Nobody knows how long they will live. This is one of the most challenging facts about retirement planning: How many years of retirement income will you need? Save too little and you risk spending your savings and relying solely on Social Security income.
Looking at average life expectancy is a good place to start. The Social Security Administrations life expectancy calculator can provide you with a solid estimate, based on your date of birth and gender. Just remember: Average calculations cant take into account your health and lifestylenow or in retirementor family history that could impact your life expectancy, so youll want to consider them in any calculations you do.
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Sharon Marchisello Of Sharonmarchiselloblogspotcom
Sharon is the author of the Live Cheaply, Be Happy, Grow Wealthy e-book, which is based on her own experience of retiring early, living frugally, and investing money. She also writes about financial fitness and retirement.
How much do you need for retirement and why?
I set a personal goal of $1 million, because it sounded like plenty of money but still achievable. But since no one really knows how long they will live, and what inflation will be like, I strive to save as much as I can.
Sharon adds that she also arrived at her $1 million target after using the Rule of 25, where she estimated her monthly expenses, and added it to her expected fixed income, then multiplied the difference by 12 to get a yearly estimate. And finally multiplied the number to 25 to get how much she should earn for a 25-year retirement.
What conservative investment option can you recommend to a friend whos afraid of risk?
The most conservative investment option, with a guaranteed return, is the retirement of your own debt.
Sharons response to this question is unique among the responders for this article, but her logic is quite sound.
She continues, Mot consumer debt carries a higher interest rate than most investment products these days. As you whittle away at the principal, you eliminate the interest expense you would have otherwise paid.
The less debt you have at retirement, the less money youll need to cover your living expenses.
Spending During Your Retirement
So, you’ve squared away your investments, and you’re counting down the days until your 50th birthday. How much money should you withdraw each year during your retirement? For a traditional retirement, many investors recommend withdrawing 4 percent of your nest egg’s initial value each year, adjusted for inflation. If you start off by withdrawing 4 percent of your savings that’s $47,200 if you have a $1.18 million nest egg there’s an 80 percent chance of your savings lasting for 30 years, but if you take a 6 percent draw that would be $70,800 the odds drop to 25 percent .
We talked about living off 55 to 80 percent of your pre-retirement income, but that amount can vary depending on what you intend to do during your retirement. Maybe you want to withdraw more money at first to travel the world and scale down as you get older. Maybe the peace of mind of knowing you have funds for a medical emergency further down is incentive enough for you to keep your withdrawals low. Simply put, it’s a matter of balancing your enjoyment of retirement with your ability to pay for it.
You might decide to make bigger decisions to meet your retirement goals, like foregoing having children the U.S. Department of Agriculture estimates it costs $284,570 to raise a child in a two-parent, middle income family, not including college . After you retire, you might consider moving to a country with a favorable exchange rate or low cost of living to stretch your funds even further .
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How Much Profit Does A Rental Property Produce
Before you make your calculations, avoid the common mistake of overestimating how much profit youll take from the rent you charge.
According to Morris Invest, you should estimate 40% of your rental income will go to expenses like insurance, property taxes, potential vacancies and property management. However, dont assume youll pocket the other 60%.
The government taxes your profit separately from the property taxes you already paid, and unless you own the property outright, you still have to make a monthly mortgage payment. For example:
- If you charge your tenant $2,000 a month, youll get $24,000 per year.
- Accounting for expenses, youll subtract 40%, or $9,600, leaving you with $14,400 per year or $1,200 per month.
- If your monthly mortgage is $500 per month, youll be left with a monthly profit of $700 but keep in mind those are pre-tax dollars.
In the previous example, the retiree with a $100,000 salary who planned to live off of $75,000 would need $6,250 per month.
With this example as the baseline, the retiree would need nine rental properties to retire early. But in 12 years, after reaching full retirement age, the addition of Social Security and Medicare might allow the retiree to sell one of the nine properties, live off the income from the remaining eight, and invest the windfall from the sale. Hopefully, your propertys value will appreciate during those dozen years and you might pay off the mortgage of one or more.
What Is The Average Pension Pot
According to the FCA, the average pension pot in the UK is £61,897, which is very little once you start taking an income from it. For example, if you draw 4%, which is £2,475 a year, and add the maximum new state pension of £9,339, your annual retirement income will come to £11,814.
If you want to retire at 55, you need more than £61,897 as you will have more years in retirement. Therefore, a good pension pot at 55 should be at least triple the amount. To achieve this, you need to save as hard as you can while working. Also, the more you save, the more robust your retirement will be.
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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.
Six Tips To Help Retire At 55
Once youve paid off expensive debt and saved up three months of your outgoing in a rainy-day cash fund, its time to make your money work harder for you. The earlier you start, the better. Not only do you put more money aside, but you also benefit from compounding one of the most powerful forces of investing.
Take the time to set a budget, taking into account when you want to retire and how much youre going to need. Then its time to put as much as you can aside each month into your pension to enjoy maximum tax relief. Of course, you wont be able to get this money back in an emergency, so make sure you can afford it. Alternatively, invest in a Stocks & Shares ISA or General investment account to enjoy more flexibility in terms of withdrawals.
Dont let expensive management fees eat into your retirement savings. There are low-cost opportunities for investors wanting to protect their money and grow it for their future.
As you go through life, youre going to come up against competing priorities, whether its getting on the housing ladder, spending on your children, or house renovations. Try not to sacrifice the amount you put into your pension it may be challengingat times, but it will be worth it in the long run.
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Compare Your Current Spending With Expected Retirement Spending
Look at how much you spend now. Then, figure out how those expenses will change when you’re retired.
For example, you wont need to spend money on getting to work, but you might decide to spend more on hobbies or on travel.
You may save money by taking advantage of seniors discounts.
Low-fee bank accounts for seniors
Many financial institutions offer low-fee bank accounts for seniors. They usually offer these accounts to people 60 years old and older. Speak to somebody at your financial institution to find out if they have accounts for seniors.
Seniors who have a low income can get special no-cost bank accounts. Find out if you’re eligible to get a no-cost bank account.
Discounts on goods and services
Many businesses offer discounts to seniors on a wide range of goods and services including:
- groceries or household supplies
Always ask about seniors discounts. It could save you money.
Jonathan H Todd Of Jonathantoddcom
Jonathan is a Chartered Financial Analyst, hes also a data analyst and author at NerdWallet. He writes articles that help readers make sense of the current economy and how it affects regular investors.
How much do you need for retirement and why?
The traditional rule of thumb is to replace 80% of your income, but Im planning to replace 100% of my income for two reasons:
-
Saving 80% of your income is hard enough, so if you aim to save higher, youre likely to save more.
-
Transitioning into retirement is easier if you save more when youre still working
He also explained how saving more of your annual income will make your retirement transition easier.
If you only save 10% of your annual income, youll be used to spending 90% of your income during your active years. But if you save 20% of your income, youll be used to living off 80% of your salary.
Saving more means youre more likely to hit your retirement goal, and youll be more adjusted to the decreased spending during retirement.
What conservative investment option can you recommend to a friend whos afraid of risk?
For a millennial like me, the definition of risk is different compared to somebody closer to retirement. For people my age, the bigger risk isnt investing in conservative investment options, its NOT saving enough.
Its risky to invest too much in bonds or other low risk assets, because those equal to lower returns.
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