Putting It All Together
Now its time to take all your current numbers together to get an estimate of how much you need to have a comfortable retirement.
Lets assume youre a 25-year-old male who makes $50,000 per year, has $3,000 per month in expenses and plans to retire at 67 years old.
The first step is to look at how long you should expect to live in retirement. According to the SSA life-expectancy calculator, by the time you hit 67 years old, your life expectancy will be 87 years.
The next step will be to determine your expenses in retirement. By 87 years old, your expenses will have gone up to $9,636.53 per month, using the inflation calculator set at 1.9%. That adds up to $115,638.36 per year.
Now, lets give you a little relief by adding your anticipated Social Security income. According to SSAs quick calculator, if you received periodic raises that matched inflation, your full retirement benefit would be $8,551 per month. Remember, though, you will only see about 80% of this, so that drags the number down to $6,840.80 per month.
Deducting your Social Security income from your projected monthly expenses leaves you with $2,795.73 per month to cover with retirement savings, which is $33,548.76 per year.
Heres a quick review of the numbers:
Anticipated monthly Social Security income : $8,551
80% of social security income: $6,840.80
Required annual withdrawal from retirement savings: $33,548.76
Here are the numbers at a glance:
Impact Of Inflation On Pensions And Savings
The amount you get from public pensions, like the Old Age Security pension and Canada Pension Plan, is protected against inflation. This means as the cost of living goes up, the value of your benefit goes up as well.
Not all employer pensions are protected against inflation. Ask your pension administrator or employer whether your pension is protected against inflation.
Personal savings and investments, such as mutual funds or guaranteed investment certificates , are usually not directly protected against inflation. Your savings need to grow by at least the rate of inflation. If not, the amount of things your savings can buy in the future will be less than what they can buy now.
For example, something bought for $100 in 2002 would cost $129.92 in 2016. If your income isn’t protected against inflation, you may have a hard time maintaining your lifestyle in retirement as the cost of goods and services increases.
Retirement Calculator How Much Money I Need To Retire
With the few rules of thumb outlined, you can easily create a formula.
- TGA = Target Retirement Age
- PI = Pension Income
Portfolio Value = * PI)
See some example in the table. Those with a pension plan dont really see total value of their pension but rather the income they would receive and as such, remove the income from the total.
In the examples, no pension income is considered.
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What Is Considered A Wealthy Retirement
In a study of retirees with less than $1 million in assets, EBRI found wealthy retirees tend to have several things in common. They tend to have paid off their homes and don’t have credit card debt or auto loans. They also have more than $320,000 saved for retirement though what each household needs will vary.
Retirement Planning Savings Tip
When using an annuity to save for retirement, open up two separate annuity contracts. Ensure one of the contracts is a Roth IRA, and contribute the annual maximum amount every year.
Why? Because when you eventually retire, all of your income from the Roth IRA retirement account will be tax-free.
Theres a high probability that taxes will continue to increase each year so pay the taxes now and reduce your tax bill in the future.
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Set Your Retirement Goals
How much you need to save depends on how you want to spend your retirement. Think about:
- your travel plans
- your age when you retire
- if you’ll work after you retire
- if you’ll have children or grandchildren to support
- where you want to live
- whether youll have debt to pay, such as a mortgage or a loan
Stay On Track For Retirement By Knowing How Much You Need To Save By What Age
A key part of retirement planning is to answer the question: How much do I need to retire? The answer varies by individual, and it depends largely on your income now and the lifestyle you want in retirement.
Knowing how much you need to save by age can help you stay on track and reach your retirement goals. There are a few simple formulas that you can use to come up with the numbers.
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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:
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.
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Step : Input How Much You Plan To Spend Per Year In Retirement And How Much Cash You Currently Have Saved
Edit the numbers here in either the Simple or Ultimate calculator:
Your current savings are the liquid assets you have.
Liquid assets are the cash in a checking or savings account, cash you have stuffed in your mattress, or any assets you plan to sell before you retire.
Your Expected Yearly Retirement Expenses is how much you plan to spend, in 2022 dollars, every year that youre retired.
The average American spends $61,749 per year. But folks 65 and older spend $48,106 per year on average.
Basically, if you want a lavish lifestyle or if you support multiple people, put a bigger number into this cell. If you want something more minimalistic or plan to move somewhere with a lower cost of living, put in a smaller number.
And with the Simple Retirement Calculator thats all you need to do!
Youll see a calculation in the spreadsheet that looks like this:
Your Average Inflation-adjusted Yearly Expenses is what you put in for your Expected Yearly Retirement Expenses, adjusted for inflation and averaged out over the expected length of your retirement.
The Total Cost of Your Retirement is just those yearly expenses, adjusted for inflation, added together.
This is how I got that $4 million I used to scare readers to attention at the beginning of this report:
The Savings per X to Hit Target are just the Total Cost of Your Retirement divided by the number of years, months, or weeks you have until you retire.
What Is A Good Monthly Income In Retirement
Median retirement income for seniors is around $24,000 however, average income can be much higher. On average, seniors earn between $2000 and $6000 per month. Older retirees tend to earn less than younger retirees. It’s recommended that you save enough to replace 70% of your pre-retirement monthly income.
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Retirement Savings Confidence By Age
Anxious that you aren’t saving enough for retirement? You’re not alone. A 2020 survey by Charles Schwab of currently employed 401 plan participants found that saving enough for retirement continues to be a leading source of significant financial stress for all generations. Participants in the survey anticipate that the economic fallout from the COVID-19 pandemic will have an impact on their retirement savings.
Overall, only 37% of survey respondents think they are “very likely” to achieve their retirement savings goals. Almost half believe they are “somewhat likely” to do so, and 14% said it is “not likely” at all. Gen X has the least confidencejust 32% feel it is “very likely” they will reach their goalscompared to 39% of baby boomers and 42% of millennials.
In the early and middle years of your career, you have time to recover from any losses in your retirement accounts. That’s a good time to take some of the risks that allow you to earn more with your investments.
How Much To Save For Retirement
According to Fidelity, you should be saving at least 15% of your pre-tax salary for retirement. Fidelity isnt alone in this belief: Most financial advisors also recommend a similar pace for retirement savings, and this figure is backed by studies from the Center for Retirement Research at Boston College.
For many people, however, saving for retirement isnt as simple as setting aside 15% of their salary.
The 15% rule of thumb takes a couple factors for grantednamely, that you begin saving pretty early in life. To retire comfortably by following the 15% rule, youd need to get started at age 25 if you wanted to retire by 62, or at age 35 if you wanted to retire by 65.
It also assumes that you need an annual income in retirement equivalent to 55% to 80% of your pre-retirement income to live comfortably. Depending on your spending habits and medical expenses, more or less may be necessary. But 55% to 80% is a good estimate for many people.
Finally, the 15% rule wont provide you with a nest egg that supplies all of your retirement income. Youll most likely derive part of your retirement income from Social Security, for example. All in all, the 15% estimate should provide you with steady retirement income that lasts into your early 90s, at a rate of around 45% of your pre-retirement income.
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Retirement Rule Of Thumb: 4% Rule
There are different ways to determine how much money you need to save to get the retirement income you want. One easy-to-use formula is to divide your desired annual retirement income by 4%, which is known as the 4% rule.
To generate the $80,000 cited above, for example, you would need a nest egg at retirement of about $2 million . This strategy assumes a 5% return on investments , no additional retirement income , and a lifestyle similar to the one you would be living at the time you retire.
Keep in mind that your life expectancy plays an important role in determining if the 4% rule rate will be sustainable. In general, the 4% rule assumes that you will live for about another 30 years in retirement. Retirees who live longer need their portfolios to last longer, and medical costs and other expenses can increase as you age.
The 4% rule does not work unless you stick to it year in and year out. Straying one year to splurge on a big purchase can have major consequences because this reduces the principal, which directly impacts the compound interest that a retiree depends on to sustain their income.
Plan For Unexpected Expenses In Retirement
Unexpected events can have a big impact on your retirement savings.
It’s possible that you could face:
- having to retire earlier than expected because of personal, professional, or health reasons
- major unplanned expenses such as home or car repairs
- health emergencies, or a need for additional care, for yourself or a loved one
- having to move or make changes to your home because of a change in your health or the health of a loved one
To help plan for unexpected events, set up a bank account or another type of investment or savings tool to use as an emergency fund. Have a percentage of your income automatically deposited into the account. The fund should be enough for you to live on for 3 to 6 months.
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How To Retire On $500k
By Justin Pritchard, CFP® in Montrose, CO
Sometimes retirement advice relies on round numbers and rules of thumb. For example, you might hear that you need $2 million to retire. But the amount you need depends on things like your monthly spending and any sources of retirement income.
Most people never reach $1 million in savings, so it may be helpful to see how it looks to retire on $500k.
Ultimately, anybody approaching retirement faces a choice: Do you work longer so you can continue saving, or can you retire comfortably with less?
How Much Savings Will You Need To Retire
Now let’s determine how much savings you’ll need to retire. After you’ve figured out how much income you’ll need to generate from your savings, the next step is to calculate how large your retirement nest egg needs to be in order to be able to produce this much income in perpetuity.
A retirement calculator is one option, or you can use the “4% rule.” While the 4% rule admittedly has its flaws, it’s a good starting point for determining a safe annual withdrawal amount.
The 4% rule says that, in your first year of retirement, you can withdraw 4% of your retirement savings. So, if you have $1 million saved, you would take $40,000 out during your first retired year either in a lump sum or as a series of payments. In subsequent years of retirement, you would adjust this amount upward to keep up with cost-of-living increases.
The most important consideration in deciding how much you need to retire is whether you’ll have enough money to create the income you need to support your desired quality of life after you retire.
The idea is that, if you follow this rule, you shouldn’t 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.
To calculate a retirement savings target based on the 4% rule, you use the following formula:
Retirement savings target = Annual income required x 25
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Retirement Calculator: How We Got Here
Our free calculator predicts your retirement nest egg, and then estimates how it would stretch over your retirement in todays dollars, taking inflation into account. Our default assumptions include:
A 3% inflation rate.
Salary increases of 2% per year.
A 5% rate of return in retirement .
Enter your age, income, current savings and monthly savings rate to see how you’re doing. If you wish, you can enter more details in the Optional settings, such as your expected rate of return before retirement and what you expect from Social Security . You can also fine-tune your retirement spending level, retirement age and more.
It’s Not About Money It’s About Income
One important point when it comes to determining your retirement “number” is that it isn’t about deciding on a certain amount of savings. For example, the most common retirement goal among Americans is a $1 million nest egg. But this is faulty logic.
The most important factor in determining how much you need to retire is whether you’ll have enough money to create the income you need to support your desired quality of life after you retire. Will a $1 million savings balance allow you to create enough income forever? Maybe, but maybe not. That’s what we’re going to determine in the next few sections.
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Saving Outside Of Retirement Accounts May Be Key To Retiring Comfortably
Youll generally have the best opportunity to retire early if you have investment assets outside of retirement assets. Taxable investment assets offer tax planning opportunities in retirement and also increase overall savings. Especially for high earners or one-income households, maxing out your retirement accounts probably isnt enough.
As I illustrate in this analysis for Forbes, a couple both maxing out their 401s from age 35 to 65 are likely to attain a safe retirement income of $65,000 annually, increasing by inflation. Why not more? Because we ran a Monte Carlo simulation, which more accurately represents how the market moves.
If we ran the same analysis but using a static return with no deviation to account for down years, , the couple would think they could spend $100,000 per year instead. At this level of spending, theres a 50% chance they would run out of money during retirement under normal market conditions. More on stress testing a retirement plan below.
A taxable brokerage account is the most flexible type of investment account. There is no contribution limit or rules about when you can sell funds and withdraw the cash. In exchange for flexibility, you sacrifice the tax-deferred growth and tax deduction you get with 401 contributions.
Estimate How Much Super You’ll Have
You probably know how much super you have now, but do you know how much you’ll have when you retire?
Use the Moneysmart retirement planner to estimate:
- how much money you’ll have to spend each year once you retire
- how fees, investment options and contributions will affect your retirement income
You can also use the planner to test out different scenarios and work out how to grow your super.
Estimate how much super you’ll have when you retire.
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