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. For example, Social Security replaces about 40% of the average American’s pre-retirement income all by itself. The percentage is typically lower than this for higher-income retirees, but, for most people, Social Security is a significant income source.
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 in this step. 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.
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 is being taken care of by sources other than savings.
So, in summary, you can estimate the monthly retirement income you need to generate using this formula:
Monthly income required = Estimated monthly retirement expenses-Monthly retirement income from other sources
Having An Emergency Fund
But, before you start investing, itâs first a good idea to build an emergency fund that you can tap if you ever need cash. If you ever have medical bills or unexpected home- or auto-related expenses, having an emergency fund can help you avoid accumulating large credit card balances as a result of these unforeseen expenses.
Itâs generally good to have three to six months of income set aside in a liquid account that you can access quickly. But, this really depends on your income and lifestyle, the potential size of costs you might incur without warning, how quickly you can cut other expenses if the need arises. Still, a few months is usually a good rule of thumb.
As you build your emergency fund, itâs a good idea to have at least part of it in a bank account that can be accessed immediately if necessary. Once youâve accumulated more than one monthâs income, you might consider putting some of it in an investment account. If you go this route, be sure to use less volatile investments and have your bank account linked to your investment account so you can get your money within seven to 10 days if you need it.
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.
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What Percentage Of My Income Should Go To Savings
First, itâs helpful to start with a general guideline. The rule of thumb when it comes to how much of your income you should save is 20%.3 Why 20%? The premise is that you divide your spending and savings into different percentages and put 20% of your after-tax pay toward savings. This standard was made popular by Massachusetts Senator and Harvard Bankruptcy expert Elizabeth Warren and her daughter Amelia Warren Tyagi in their book, âAll Your Worth: Your Ultimate Lifetime Money Plan.â
Thereâs an exception though: If you have credit card debt with a high interest rate, you may want to work on paying that off first, which will help you save more money over time. Once the debt is paid off, then all 20% can go toward savings.
Below is a chart with 4 income levels and approximate take-home pay, including different ballpark savings goals per year and month.4
|Yearly Salary for single individual||Approximate take-home pay||Annual Savings Goal|
If youâre looking at these numbers and thinking, âno way,â donât freak out just yet. Any amount you put toward savings makes a difference. And knowing these numbers gives you a goal to work toward over time.
What To Do Next
- A strong financial future starts with a solid financial plan. Check out our simple guide to making yours.
- A financial professional may talk you through how changes to your financial goals can shift your saving, especially for retirement. Check with your HR department or employer to see if your companys retirement savings plan offers this service. Or, we can help you find one.
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Plan For Medical Costs
Safeguard your finances against unexpected medical costs. Some hefty medical bills can quickly eat up a lifetime of savings. A couple in their mid-60s will need $295,000 to cover health care costs in retirement, according to a 2020 Fidelity estimate.
Then theres the stratospheric cost of extended care at nursing homes. A report from Genworth says the median annual cost of a private room in a nursing home was $102,200 in 2019.
With that in mind, retirement planning must include some consideration of future medical costs. One option is long-term health insurance, which pays for extended medical care including such things as nursing and assisted living but it can be expensive.
It has to be easily affordable not just for today but for the whole premium period, says Marilee Driscoll, founder of Long-Term Care Planning Month, a public-awareness effort that takes place during the month of October.
If You Start At Age :
- With a 4% rate of return, you need to earn $155,086 per year and save $1,938.57 per month contributions)
- With a 6% rate of return, you need to earn $114,867 per year and save $1,435.83 per month
- With an 8% rate of return, you need to earn $83,563 per year and save $1,044.53 per month
For context, the average American’s 401 plan grew at a compound annual average rate of 14.2% between 2010 and 2016, according to a study of more than 6 million accounts by the Employee Benefit Research Institute, a nonprofit based in Washington, D.C. Of course, there’s no guarantee of similar growth in the future.
Keep in mind that these numbers don’t take into account the many ups and downs you may experience over your lifetime, including periods of unemployment or sudden financial windfalls or losses.
It’s also important to consider how pay increases will affect your savings over time. If you consistently put away 15% of your income, the actual amount you contribute each month will grow as your salary rises, which can help you build up your retirement fund more quickly.
And while it may be difficult to save 15% of your earnings when you only make around $30,000 or $40,000 a year, remember that you can work your way up. Save what you can now and increase your contributions as your salary rises. That may mean eventually putting away more than 15% of your salary later to make up for lost time.
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Im 35 What Should I Have Saved
There is a lot of research showing that people tend to rely on approximations or rules of thumb when it comes to financial decisions.
With this in mind, many financial firms publish savings benchmarks that show the ideal levels of savings at different ages relative to an individuals income. A savings benchmark isnt a replacement for comprehensive planning, but it is a quick way to gauge whether youre on track. Its much better than the alternative some people useblindly guessing! More importantly, it can act as a catalyst to take action and start saving more.
However, for the benchmark to be useful, it needs to be realistic. Setting the target too low can lead to a false sense of confidence setting it too high can discourage people from doing anything. Articles on retirement savings goals have generated spirited discussion about the reasonableness of the targets.
How Much Should You Save For Retirement
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Its the million-dollar question literally: How much should I save for retirement?
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Are There Other Methods To Make Sure I Am Saving Enough
An alternative option is to calculate how much you will need once you retire. You should take into account how much you plan on traveling and the increased cost of living. Then, you need to determine how much you need to save each month to reach that goal. You can talk to a financial planner to determine how to invest this money. When you are in your twenties you should be more focused on contributing as much as you can, the early investment will pay off in the long run. This is even more important since the Social Security system will likely be adjusted by the time you reach retirement age. Remember when you do this calculation, you need to consider how much your investments will earn in interest each year in addition to what you contribute. A retirement savings calculator can help make the match a bit easier.
Take Advantage Of Catch
Turning 50 years old has some advantages, including being able to contribute more to your retirement account with catch-up contributions. In 2021, individuals aged 50 or older can save up to $26,000 in a 401 and up to $7,000 in an IRA. Take advantage of these opportunities as soon as youre able.
Its not hopeless, says Dee Lee, certified financial planner professional and author of Women & Money while discussing those who have yet to get serious about their retirement savings.
Lee describes a couple who determines that they need to do some belt-tightening. If each contributes $10,000 a year to a 401 plan, theyll have about $90,000 each after seven years, assuming the money grows by 7 percent a year, or a total of $180,000 between them.
But thats a big assumption. Your portfolio would probably have to be allocated heavily toward stocks and have risen when you need them to. Historically, stocks have earned about 10 percent a year, while bonds have clipped along at about 3 percent over the last decade. If youre unwilling to invest in stocks, you may well wind up short of your goals.
Those in their 50s, nevertheless, are generally too young to play it too safely.
This is not the time when you go to cash, Rinaldi says. You may stay 50-50 in stocks and bonds. But youre going to need growth in your portfolio.
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Easy Ways To Boost Your Savings
Here are some simple ways to help you start saving up.
Automate your savings: Set up an automatic savings plan so that a small, set amount of money is moved from your checking to your savings account on a regular basis. Even sparing $25 per month will give you a starter savings of $300 at the end of the year. Saving a small amount of money now, little by little, could add up to a significant sum in the future.
Rethink direct deposit: Instead of having your entire paycheck directly deposited into your checking account, have your employer deposit a portion of your check into checking and the rest into a savings account.
Put your spare change to work: There are apps that will take spare change on any amounts paid on a debit card and put them into savings accounts or even invest them. Those little amounts can add up over time.
Dig through the couch cushions: Kidding! Sort of. Do you have a jar of loose change cluttering up the top of your dresser? Lug it to a coin sorting machine every so often, and then put that amount into savings. You may be surprised at how much you have.
Most importantly, consistency is key. No matter what percentage of your salary you save, if you deposit small amounts regularly, you may be able to build up a large chunk over time to achieve your goals.
What Are You Saving For
True financial independence means that you can sustain your chosen lifestyle entirely from your investments interest and dividends.
How much money do you need to save to do that?
Good question. The simple answer: it all depends. It depends on whether youre willing to live at the poverty line, need two homes and a sailboat, or fall somewhere in between. It also depends on how well your investments perform. If you can earn an average annual return of 7% on your money, you can stop working with a lot less than if you only earn 3%.
For simplicitys sake, well use the common 4% rule, which states that, theoretically, you could withdraw 4% of your principal balance every year and live on this indefinitely. That means that youll need to save 25 times your annual expenses to become financially independent.
There are problems with the 4% rule, of course. For one, there are no risk-free investments that yield anywhere close to 4% today. Sudden inflation could also become a problem. To account for this, and for simplicitys sake, well base how much you need to save based on your gross income not your expenses.
In our example, we assume that you want to save 25 times your annual income, rather than your annual expenses. By default, youll actually be saving more than you need . But when discussing your source of income for the rest of your life, its best to be conservative.
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Where Do I Store My Emergency Fund
Listen closely: You dont want to keep your emergency fund in your savings account. However, you want to be able to access your money quickly and easily, but not too easily.
The best thing to do is put that emergency fund in a money market account. Most of them will give you a debit card and checks to usethat way you can get to it when you really need to .
And dont worry about how much interest the account earnsyour emergency fund is not an investment! That money isnt there to make you money. Its there to act as a safety net when an emergency actually hits.
How Much Should You Contribute To Your 401 Rule Of Thumb
As a rule of thumb, experts advise that you to save between 10% and 20% of your gross salary toward retirement. That could be in a 401 or in another kind of retirement account. No matter where you save it, you want to save as much for retirement as you can while still living comfortably.
Its important to say that this is just a general rule. The actual amount you should save depends on your individual situation. For example, if you are 50 years old and dont have any retirement savings, you should save more than 20% of your gross annual salary. If youre 30 years old and already have $100,000 in retirement savings, you could probably decrease your contributions for a bit in order to pay off a mortgage or loan. Its difficult to create a one-size-fits-all plan, because everyone is in a different place with his or her finances.
Saving 10% to 20% of your salary every year might sound like a lot. Luckily, you dont have to do it all at once. You can spread your contributions out throughout the year and you can contribute more or less some years. You also dont have to save all that money through your 401. Lets take a step back and talk about other factors you should consider when you think about how much to contribute to your 401.
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Take Note Older Savers
If you start saving later in life, especially when you’re in your 50s, you may need to increase your contribution amount to make up for lost time.
Luckily, late savers are generally in their peak earning years. And, from age 50, they have a greater opportunity to save. As noted above, the 2021-2022 limit on catch-up contributions is $6,500 for individuals who are age 50 or older on any day of that calendar year.
If you turn 50 on or before Dec. 31, 2021, for example, you can contribute an additional $6,500 above the $19,500 401 contribution limit for the year for a total of $26,000 including catch-ups.
“As far as an ‘ideal’ contribution is concerned, that depends on many variables,” says Dave Rowan, a financial advisor with Rowan Financial in Bethlehem, PA. Perhaps the biggest is your age. If you begin saving in your 20s, then 10% is generally sufficient to fund a decent retirement. However, if you’re in your 50s and just getting started, you’ll likely need to save more than that.”
The amount your employer matches does not count toward your annual maximum contribution.
How Much You Should You Save For Retirement
I want you to aim to save 10-15% of your gross income for your future self. Of course, more is always better.
That said, if you cant afford to save 10% right now, its OK to start off small and gradually work your way up. Even if you think the best you can do right now is to save just 1%, dont let that stop you. Anything is better than nothing. At the same time, try to be ambitious. However much you think you can afford to save, do more. If you think you can save 4%, save 6%. If you think you can save 10%, save 12%.
Most of us tend to underestimate how much we think we can manage. As a result, we wind up low-balling ourselves and our futures.
To help you decide how much of your income to set aside, I created a pay yourself first formula. Everyones individual situation is different, but these percentages should give you an idea of what your financial standing could look like depending on how much you save. Hopefully itll inspire you to set aside more than you currently are.
If you want to be
Dead broke: Dont pay yourself first. Spend more than you make. Borrow money on credit cards and carry debt you cant pay off.
Poor: Think about paying yourself first, but dont actually do it. Spend everything you make each month and save nothing. Keep telling yourself, someday
Middle class: Pay yourself first 5-10% of your gross income.
Rich: Pay yourself first 15-20% of your gross income.
Rich enough to retire early: Pay yourself first at least 20% of your gross income.
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