Plan For Your Retirement
The emphasis is on “your” retirement here, because no 2 will look the same. You could take two 55-year-old women with the same job and even the same postal code, and their vision for this next chapter will probably be very different along with what they can actually afford. Thats because a range of factors from how much we have saved to how much we want to spend can all influence just how much money well need to retire. Ideally, comfortably as well!
Whether youre 25 or 55, it can be helpful to sit down and answer a few questions to help you clarify what retirement might look like to you. Heres what you should ask yourself and why that matters:
1) When do I want to retire?
Its just math: The later you retire from full time work, the longer you have to accumulate that retirement nest egg. You might want to retire at 55 like your parents did, but do you have their fantastic pension? Its also worth remembering that were living longer, so its possible you may have to make this amount last for several decades. Is this something you want?
2) Where would I like to live in retirement?
3) What will my expenses be?
4) What will my income be each month?
How Much Income Does The Average Retiree Have
The US Census Bureau reports the median retirement income for Americans over the age of 65 as both a median and an average. In the most recent 2019 data, the figures were as follows: Median Retirement Income: $ 47,357. To see also : How much retirement should i have. Median Retirement Income: $ 73,288.
What is the average retirement income in 2020? According to data from the U.S. Census Bureau, the median retirement income for retirees aged 65 and over is $ 47,357. The median median retirement income is $ 73,228.
What is the average monthly income of retirees? The median retirement income for the elderly is approximately $ 24,000 however, the average income can be much higher. On average, seniors earn between $ 2,000 and $ 6,000 per month. Older retirees tend to earn less than younger retirees.
How To Tailor The Rule Of Thumb
These savings and spending assumptions may not fit your situation, so the 75% starting point may not be right for you. For example, you may be saving closer to the 15% we recommend for retirement. Fortunately, T. Rowe Price analysis found this to be an easy adjustment to make: Every extra percentage point of savings beyond 8%, or spending reduction beyond 5%, reduces your income replacement rate by about one percentage point.
Think of these adjustments as a nearly one-to-one ratio. If youre saving 12% of your income instead of the assumed 8%, take your replacement rate of 75% and subtract four percentage points, resulting in a personally adjusted estimate of around 71%.
The way youve saved for retirement also affects the replacement rate. The 75% starting point assumes all savings are pretaxlike a Traditional 401 or IRA. Thats a conservative assumption, since generally youre fully taxed on those assets when you withdraw them. Saving with a Roth account, on the other hand, is after tax and can generate tax-free income when distributions are qualified.* That means if you have a large proportion of your retirement savings in Roth accounts, your income replacement rate should be lower.
Finally, your marital status and household income are two factors that affect Social Security benefits and your tax situation. Those two factors, in turn, affect your income replacement rate. The 75% starting point reflects a household earning around $100,000 to $150,000 before retirement.
Also Check: Valic Retirement Services Phone Number
Factor No : How Much Will You Earn On Your Savings
No one knows what stocks, bonds or bank certificates of deposit will earn in the next 20 years or so. We can look at long-term historical returns to get some ideas. According to Morningstar, stocks have earned an average 10.29 percent a year since 1926 a period that includes the Great Depression as well as the Great Recession. Bonds have earned an average 5.33 percent a year over the same time. Treasury bills, a proxy for what you might get from a bank deposit, have returned about 3 percent a year.
Most people don’t keep 100 percent of their retirement savings in a single investment, however. While they might have part of their portfolio in stocks for growth of capital, they often have part in bonds to cushion the inevitable declines in stocks. According to the Vanguard Group, a mix of 60 percent stocks and 40 percent bonds has returned an average 8.84 percent a year since 1926 a mix of 60 percent bonds and 40 percent stocks has gained an average 7.82 percent.
Financial planners often recommend caution when estimating portfolio returns. Gary Schatsky, a New York financial planner, aims at 2.5 percent returns after inflation, which would be about 3.5 percent today. It’s an extraordinarily low number, he says, although it’s probably better to aim too low and be wrong than aim too high and be wrong.
Its Different For High Income Earners
High income earners are often able to save a larger percentage of their incomes than middle and lower class households. They are also almost always in a higher income tax bracket. For high income earners, using 80% of preretirement income will probably be far too high.
In How Much Income Do Retirees Really Need? Michael Finke notes the following:
When we plot out median spending as a percentage of gross income among pre-retirees, we see that those in the middle, fourth and especially the fifth quintile of income arent spending anywhere close to their income. In fact, the median household in the top income quintile is spending 36% of their gross income each year. Even the 90th percentile spendthrift in the top income quintile is spending just 63%.
Where retirement income planning is concerned, high income earners have two advantages:
And since there can be such a large variation in the incomes of high income earners, the actual percentage of income that they will need to replace in retirement will depend upon individual circumstances. Thus, it is too wide for a standard convention. As noted in the quote from Michael Finke above, the percentage can range anywhere from 36% to 63% of gross income.
Don’t Miss: Which Dental Plan Is Best For Retired Military
How Much Do People Spend In Retirement
Retirees in our survey spent around £2,170 a month per household
To help figure out how much you need in retirement, we’ve spoken to thousands of retired Which? members, both those living alone and couples, to see where their money is being spent.
Households with two people spent a shade under £2,170 a month, or around £26,000 a year, on average when we carried out research in 2021. People have spent around 4% to 5% less in as a result of the coronavirus pandemic.
This covers all the basic areas of expenditure and some luxuries, such as European holidays, hobbies and eating out. Aiming for this level of income will provide a good platform for your retirement.
Youd need £41,000 a year if you include luxuries such as long-haul trips and a new car every five years.
How To Save For Retirement In Your 30s
Once you enter your 30s, youre moving out of entry-level jobs and earning more. You may still be paying down student loans or other debts. But keep saving for retirement even as you remain laser-focused on paying down your debt. The longer you carry debt, the more you pay in interest and the less youll have available to save.
Emergency fund: Aim to maintain at least six months of living expenses in emergency savings, in a high-yield online savings account.
Additional savings: Once youre comfortable with the balance in your emergency fund, consider investing additional money in a brokerage account, which can earn higher potential returns than a savings account. This makes brokerage accounts useful for medium-term goals, like a home down payment, or other longer-term pre-retirement goals.
Educational savings: If youre starting a family, consider opening an educational savings account like a 529 plan to pay for educational expenses so you can avoid tapping your retirement to pay for college.
Catch-up tip: If debts weighing you down, consider an aggressive debt payoff strategy like the debt snowball or avalanche method.
How To Get Retirement Ready
Open a retirement account. If you have access to a GRSP, you should at the very least contribute the amount of money your employer is willing to match. You should also open a RRSP if you don’t already have one. A RRSP is one of the most popular ways to save for retirement in Canada and it comes with nice tax benefits. Learn more about RRSPs and GRSPs.
Avoid paying high fees. Fees are like savings termites they’ll chew right through your savings. When you invest with Wealthsimple, we charge a 0.5% management fees when you invest up to $100,000 and 0.4% when you deposit more than $100,000. That’s significantly less than the 2% fees paid by traditional mutual fund investors in Canada.
Make smart moves. Begin saving for retirement as early as you can and take advantage of the power of compounding. Create a budget that includes retirement savings, learn how investing works, discover smart retirement strategies and understand what it takes to retire early.
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.
You May Like: What Happens To Retirement Funds In Divorce
Crunch Some Numbers And Get Ready To Work Hard
Wondering how to retire early? Lots of people would like an early escape from the rat race, whether it is to travel, pursue a passion project, start a business, volunteer, or just stop working.
However, retirement planning is tricky enough when you plan to work until your full retirement age. It is even more so if you want to stop working yearsor even decadessooner.
Can it be done? Absolutely. But unless you are independently wealthyand few people areit will take work and discipline. Here are five key steps to take.
Calculate What Your Savings Will Cover When You’re Retired
Understanding what you expect retirement to look like will help determine how much you’ll need in order to fund that lifestyle. If you plan to travel the world in luxury, your budget will be a bit different than someone who just wants to birdwatch from the backyard each morning.
In retirement, your savings will cover many of the same expenses that you had prior to retirement. These include, to name a few:
If you don’t plan for any of these categories to change much from pre- to post-retirement, then you should have a good idea of your budget. However, if you have big plans for your retirement years, it’ll be important to determine how much your new standard of living will cost.
Quick tip: More and more seniors are going into retirement with lingering home mortgage expenses. If your home will not be paid off by retirement, be sure to account for this monthly expense in your savings.
Also be sure to account for unexpected expenses that could come up, such as medical care for you and your spouse, or even helping a child or grandchild financially.
Next, consider where you plan to live. You may want to downsize, or you might plan to buy your dream retirement home. Either way, be sure to factor in all those costs.
Note: The average age of retirement has risen steadily in recent years, from 62 to 64 for men and from 60 to 62 for women.
Read Also: Purchase An Annuity For Retirement
Impact Of Inflation On The Cost Of Goods And Services
When saving for retirement, keep in mind that goods and services will cost more in the future. You can predict how much more goods and services may cost by looking at rates of inflation in past years.
Figure 1: How much a $100 item increases in cost over time because of inflation
Bank of Canada Inflation Calculator. The average rate of inflation in Canada between the year 2000 and 2014 was 2.00%.
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.
You May Like: How Much Money Will I Need To Retire In 2045
How Much Do I Need To Retire
Most experts say your retirement income should be about 80% of your final pre-retirement annual income. That means if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce.
This amount can be adjusted up or down depending on other sources of income, such as Social Security, pensions, and part-time employment, as well as factors like your health and desired lifestyle. For example, you might need more than that if you plan to travel extensively during retirement.
Calculate Savings Required To Withdraw A Specified Annual Income
You also have the option of factoring in the effects of inflation.
Please note! This calculator assumes simple interest returns and should not be confused with Safe Withdrawal Rates on a diversified portfolio as fully explained here.
Also Check: Health Care Costs In Retirement
Follow These Steps To Find Out
How much money do you need to comfortably retire? $1 million? $2 million? More?
The most common rule of thumb is that the average person will need approximately 80% of their pre-retirement income to sustain the same lifestyle after they retire. However, there are several factors to consider, and not all of this income will need to come from your savings. With that in mind, here’s a guide to help calculate how much money you will need to retire.
What Happens If The Numbers Dont Seem Achievable
If you do the calculations and find that the savings number seems unreachable, you should review your alternatives. Figuring out how to save more or work longer are two obvious options. But you should also review retirement spending goals. Many people think they need to spend more in retirement than they really do. That, in turn, can cause them to work longer than they might like. In many cases, however, you can make a moderate savings goal work at a younger retirement age by being creative and flexible in coming up with a still-fulfilling retirement lifestyle on a more moderate budget.
David Aston, CFA, CPA, MA, is the author of the Sleep-Easy Retirement Guide, which is available online and in bookstores across Canada. This column is an edited excerpt from the book. Further details are explained in the book.
Don’t Miss: How Much Should Go Into Retirement
Factor No : How Much Can You Withdraw From Savings Each Year
A landmark 1998 study from Trinity College in Texas tried to find the most sustainable withdrawal rate from retirement savings accounts over various time periods. The study found that an investor with a portfolio of 50 percent stocks and 50 percent bonds could withdraw 4 percent of the portfolio in the first year and adjust the withdrawal amount by the rate of inflation each subsequent year with little danger of running out of money before dying.
For example, if you have $250,000 in savings, you could withdraw $10,000 in the first year and adjust that amount upward for inflation each year for the next 30 years. Higher withdrawal rates starting above 7 percent annually greatly increased the odds that the portfolio would run out of money within 30 years.
More recent analyses of the 4 percent rule have suggested that you can improve on the Trinity results with a few simple adjustments not withdrawing money from your stock fund in a bear-market year, for example, or foregoing inflation raises for several years at a time. At least at first, however, it’s best to be conservative in withdrawals from your savings, if you can.
Also of Interest
Featured AARP Member Benefits