You May Be Familiar With The Assertion That Retirement Is A Number Not An Age But What Is That Number
A slim majority of Americans typically retire between the ages of 61 and 65, according to statistics from the U.S. Census Bureau from several years ago. Another 12% retire a little later, between 66 and 69.
While delaying retirement into one’s 70s or later is less common, it certainly does happen. About 14% of workers retire between 70 and 79, while 7% of Americans wait until their 80s and beyond to leave the labor force.
Still, a sizable number of Americans do the opposite, retiring early instead of late. About 17% of labor force participants stop working between ages 50 and 60, while about 1% retire even earlier than that.
What motivates people to retire at the ages they do?
Image source: Getty Images.
Can A Couple Retire On 1 Million Dollars
Is a million dollars enough money to ensure a financially secure retirement today? A recent study determined that a $1 million retirement nest egg will last about 19 years on average. Based on this, if you retire at age 65 and live until you turn 84, $1 million will be enough retirement savings for you.
How Much Do I Need To Retire The Only Guaranteed Method To Save Money For Retirement
Shawn Plummer
CEO, The Annuity Expert
How much do you need to retire? When it comes to retirement planning, there are a lot of variables to consider. For example, how much money do you need to retire? What will your expenses be in retirement? How long will you live? These are all critical questions to be answered as part of your overall retirement plan. This guide will discuss some tips for retirement planning that can help answer these questions and help you achieve the retirement you desire.
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How Much Money Do You Need To Retire Earlier Than Age 65
So, how much money is needed to retire at 55? Again, letâs say 80% of investorsâ income during their working years is $60,000, and they would like to have retirement income last until theyâre 95. In order to live on investment returns, theyâd still need that $2 million, but would have to reach that goal earlier, by age 55.
To accumulate $2 million over a span of 30 years, one would have to save $1,633 a month, starting at age 25, assuming a 7% average annual return.
How much money is needed to retire at 60? To wind up with the same $2 million next egg, a saver would have to sock away $1,104 a month.
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 thatâs 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 youâre 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.
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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 retireeâs costs of living.
Itâs beyond the scope of this article to discuss exactly how this happened, but if youâre one of the many people who have fallen behind on retirement savings, donât panic. Thereâs 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. Thatâs money that youâll need someday and wonât 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 youâve got $75,000 you need to make up for.
It wonât 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.
Nowâs the right time to start.
If You Start At Age 30
Earning a 4% annual rate of return: $1,860.50 per month
- Annual salary needed if you save 10% of your income: $223,260
- Annual salary needed if you save 15% of your income: $148,848
Earning a 6% annual rate of return: $1,193.23 per month
- Annual salary needed if you save 10% of your income: $143,187
- Annual salary needed if you save 15% of your income: $95,463
Earning an 8% annual rate of return: $741.10 per month
- Annual salary needed if you save 10% of your income: $88,932
- Annual salary needed if you save 15% of your income: $59,291
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The Impact Of Time On Retirement Savings
Time is your most powerful ally for retirement savings. Small amounts invested early in your career can grow substantially larger than even big amounts invested later in life.
Lets face it, most Americans cant afford to set aside a full 15% of their income for retirement. But dont let that discourage you. Investing any amount for retirement positions you to benefit from compounding as soon as possible.
Consider two hypothetical investors. Investor A starts investing $100 a month at 25. 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.
Meanwhile, Investor B waited until 35 to start saving, but invested $200 a month. Investor B would have almost $200,000 less in their retirement balance by age 65, despite contributing almost $25,000 more.
The difference between Investor A and Investor B illustrates the power of time and compounding when understanding investment returns. A difference of just 10 years can dramatically impact potential returns earned by your investments.
More importantly, it also shows that you can still achieve very significant returns even if you cant start investing quite as early in your life. In the second scenario, Investor B only contributed $72,000 of their own money, starting at age 35. From that, they earned almost $380,000 in investment returns.
Salary Savings By Age And Retirement Savings Goal
The usual way to determine how much you need to retire is to use this formula recommended by Nate Hoskin, CFP and founder of Hoskin Capital.
Those planning to retire at 65 should have these minimums saved, according to their age range:
However, if you want to retire early, you obviously have to accelerate that pace. Its almost impossible to retire at 30 unless you receive a large inheritance or find a way to make millions in your 20s. Age 40 is slightly more realistic, though for the typical worker it would require accumulating around $100,000 per year in savings over the 20 working years.
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How To Stay On Track
The point of benchmarks isnt to make you feel superior or inadequate. Its to prompt action, coupled with a guidepost to inform those actions, even if that means staying the course. If youre not on track, dont despair. Focus less on the shortfall and more on the incremental steps you can take to rectify the situation:
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Make sure you are taking advantage of the full company match in your workplace retirement plan.
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If you can increase your savings rate right away, thats ideal. If not, gradually save more over time.
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If you have a company retirement plan that enables automatic increases, sign up.
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If you are struggling to save, many employers offer financial wellness programs or other tools that can help with budgeting and basic finances.
Use these savings benchmarks to get more comfortable with planning for retirement. Then go beyond the rule of thumb to fully understand your potential retirement expenses and income sources. Beyond your savings, think about what you are saving for and how you envision spending your time after years of hard work. After all, thats the reason why you are saving in the first place.
Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.
View investment professional background on FINRA’s BrokerCheck.
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Is Half A Million Enough To Retire On
Many experts recommend saving at least $1 million for retirement, but that doesn’t take your individual goals, needs or spending habits into account. In turn, you may not need anywhere near $1 million to retire comfortably. For instance, if you have $500,000 in your nest egg, that could be plenty for your situation.
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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.
Other Expenses To Consider
In addition to everyday expenses, youll also want to factor in the large costs for specific trips or purchases that extend outside the realm of general everyday expenses. This is critical since it could be detrimental to your budget in other areas if you dont plan for a car purchase or home purchase that could dig into expenses in other areas. Youll also want to consider whether or not its important to you to leave behind a sum of money for a spouse or children once you pass away. No matter what your larger expenses will be in retirement or whether or not youre hoping to leave behind an inheritance, these should be added to your end amount in order to properly save.
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Tax Considerations In Retirement
Retirement does not give you a reprieve from paying taxes, unfortunately. If you have tax-deferred retirement accounts, such as a traditional 401 or individual retirement account , then any withdrawals you make from those accounts will generally be taxed as ordinary income. And once you reach age 70½ or age 72 , you’ll need to take annual required minimum distributions and pay ordinary income tax on those distributions. This means the amount of money in your tax-deferred accounts does not actually represent your spending power, since a portion of that money is effectively earmarked for the IRS.
In addition, up to 85% of your Social Security benefits may potentially be taxable, depending on your annual retirement income.
Taxes can come as an unpleasant surprise to a retiree who has not planned ahead for them. This is particularly important if you retire at 60, since an early retirement means more years’ worth of living expenses to fund.
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
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.
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Determining And Calculating How Much You Need In Retirement
It’s common knowledge that you need to save and invest for retirement. But determining the size of the nest egg you’ll need is a bit more difficult. After all, if you’re willing to live frugally in retirement, you may do fine with $1 million in savings. On the other hand, if you want a more lavish lifestyle in your golden years, you may need several million — or even more.
Luckily, there are a few rules of thumb that can help you approximate how much you’ll need to have saved to retire.
To arrive at your retirement “number,” begin with your current income. To maintain a post-retirement standard of living on par with your current lifestyle, you’ll need a nest egg that can reliably generate enough passive, non-employment income per year to replace about 75% of that.
One big reason why you won’t need to replace 100% of your current income is that you’ll no longer need to save any portion of your income for retirement once you’re in retirement. Once you’re retired, you’ll be drawing down your assets rather than accumulating them.
Additionally, unlike income from employment, pension income, Social Security payments, and withdrawals from retirement accounts such as 401s or IRAs aren’t subject to federal payroll taxes, which typically total 7.65% of earnings.
Note that you’ll still owe federal and state income taxes on most of your retirement income, other than withdrawals from Roth accounts or income from securities such as tax-exempt municipal bonds.
