How Much Of Your Income Do You Need In Retirement

How Much Do I Need To Retire

How much money do you need to comfortably retire? $1 million? $2 million? More?

Financial planners often recommend replacing about 80% of your pre-retirement income to sustain the same lifestyle after you retire. This means that, if you earn $100,000 per year, you’d aim for at least $80,000 of income in retirement.

However, there are several factors to consider, and not all of your income will need to come from savings. With that in mind, here’s a guide to help calculate how much money you will need to retire.

Calculate How Much Income You Need For Retirement

If you follow these steps, you will receive a monthly paycheck that covers your annual expenses like you were still working and earning your desired annual retirement income.

How Much Of Your Income Do You Need To Replace In Retirement

Dear Carrie,

I’ve heard that generally speaking you can get by on 70-80 percent of your annual income in retirement. Is that really a reliable estimate?

A Reader

Dear Reader,

A lot of people would certainly sleep better knowing they had enough money to live comfortably in retirement. That’s why we have approximations like the 70-80 percent guideline. They give people an estimate to work towards, which is a step in the right direction.

But a guideline is one thingand reality can be another. So your question gets right to the heart of the matter: How much of your annual income do you really need to live comfortably in retirement? If only the answer were as simple as the question.

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How Do You Know How Much Income You Need In Retirement

Everyone wants to live comfortably when they retire. But what does that actually look like?

For most people, it means whatever Social Security and their portfolio can support when they get around to retiring. What they get in retirement just sort of happens.

But retirement shouldnt just happen. Retirement should be whatever you want to make of it. To do this, you need a financial plan and specific retirement spending goals. Without these goals, youre just throwing money at your portfolio .

Pinning down realistic spending goals for retirement is far easier said than done. Most people have no idea what they want to spend in retirement, and they dont even really know how to begin figuring it out. If thats you, its completely normal. But there are a couple different ways to approach the problem.

How Long Do You Want To Plan For

Obviously you dont know exactly how long youll live, and its not a question that many people want to ponder too deeply. But to get a general idea, you should carefully consider your health and life expectancy, using data from the Social Security Administration and your family history. Also consider your tolerance for managing the risk of outliving your assets, access to other resources if you draw down your portfolio , and other factors. This online calculator can help you determine your planning horizon.

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How Much Income Do You Need In Retirement

How much income do you need in retirement? Its one of the most important questions in financial planning. Given its importance, it gets relatively little attention. The standard way to determine how much income you need in retirement is called the replacement ratio. The replacement ratio tells you how much of your income you need to replace in retirement relative to your current income.

Replacement Ratio= Retirement Income÷ Current Income

If you currently make $100,000 per year and you wanted to have a $70,000 income during retirement your income replacement ratio would be 70%. This is the standard rule of thumb used in the financial services industry.

How To Increase Your Retirement Income And Savings

There are several actions you can take now to increase your savings and income when you retire.

Increase Your Social Security Income

One way to boost your retirement income is to focus on securing higher social security benefits. Here are a few suggestions:

• Postpone collecting benefits. The longer you wait, the more you will collect. If you wait until age 70, you can collect almost $300 extra each month. However, there is no benefit for waiting after 70 to collect benefits.
• Higher earning spouse defers. If you are married, the higher earning spouse should defer the start of benefits for as long as possible so that you can maximize your monthly Social Security benefits as a couple.

Increase Your Retirement Savings Income

• Maximize your account savings contributions. Take advantage of pre-tax contributions and max out your account contributions.
• Have multiple retirement savings accounts. Maximize your benefits by having multiple pre-tax and tax-free retirement savings accounts.
• Maximize catch up contributions. If youre over 50, take advantage of the extra contributions you can add to your retirement savings each year.
• Eliminate or reduce unnecessary expenses. Use a spreadsheet or app to help you keep track of your expenses and find ways to eliminate or reduce discretionary expenses.

Find a Financial Advisor

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Must Have Vs Nice To Have

Its also helpful to determine which expenses are essential and which expenses are discretionary. Essential expenses are things you cannot live without and, usually, you cannot change the amount you pay for them. They typically include things like mortgage/rent, insurance, medical expenses, and food.

Whether an expense is essential or not will vary by individual, but it is important that you and your spouse agree on which expenses are necessary and which arent.

The Lifestyle You Want

There are a few different ways to work out how much super you need for the lifestyle you want in retirement.

If you’re close to retiring use the budget planner to estimate how much money you expect to spend when you stop working.

If you own your own home, a rule of thumb is that you’ll need two-thirds of your pre-retirement income to maintain the same standard of living in retirement.

Some organisations provide information on retirement spending:

• Super Consumers Australia has a set of retirement savings targets for people aged 55-59 and 65-69. They estimate how much you’ll need based on low, medium and high spending.
• The Association of Superannuation Funds of Australia provides an ASFA retirement standard. This estimates how much money you’ll need, based on a modest or comfortable lifestyle in retirement.

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How Much Do I Need For Retirement

Our retirement guide shows you how to build a reliable stream of income that will last no matter how long you live.

Youâve been saving diligently for years. Now retirement is in sight, and the question âHow much do I need for retirement?â has you wondering if youâre on track.

Making the shift from earning an income to living off your savings can seem like a daunting task. As retirement gets closer, you likely have questions about how youâll use your savings to generate income to last you a lifetime.

This guide is meant to help you as youâre approaching retirement. Weâll help you assess whether your retirement strategy is on track and provide some ideas to consider to help you make your money last. The goal is to help you feel more confident about your ability to turn your savings into reliable income in retirement.

What If The Retirement Savings Goal Seems Too Big To Reach

You can always adjust your goal, and many people do. For instance, instead of retiring at 65, you could work a few more years to save more.

In addition, look at your spending plans for retirement. Maybe you were planning to travel extensively. Consider reining in your plans slightly, such as focusing on the three trips most important to you. Include those in your retirement budget but give up some of the others. That may allow you to reach your retirement savings goal sooner so you can actually enjoy the travel that means the most to you.

Also, be sure to add Social Security or any other post-retirement income sources to your savings total.

Finally, consider adjusting your current budget to free up more money to sock away for retirement. If you can spend less now, you may have more available for a financially secure retirement later.

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How Long Will A Million Dollars Last In Retirement

Because annuities are a source of guaranteed income, a million dollars could last the rest of your life in retirement. A retiree can live a comfortable retirement. Based on our research, a $1,000,000 annuity will provide between $61,000 and $178,105 each year for the rest of your life, depending on age and timing. This does not include Social Security.

How Much Money Should I Have Saved If I Want To Retire At 65

Since higher earners will get a smaller portion of their income in retirement from Social Security, they generally need more assets in relation to their income. We estimated that most people looking to retire around age 65 should aim for assets totaling between seven and 13½ times their preretirement gross income.

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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.

Find Your Target Retirement Savings Goal

Fotokia / Getty Images

The sooner you begin planning for retirement, the more likely you will be to reach your retirement goals. One major challenge is figuring out how much you need to save for the future so you can fund your living expenses for the lifestyle you want to live.

You can take several approaches in deciding how much to save for retirement. Determining the right number means honestly assessing your current and future income, and identifying your ideal retirement lifestyle, along with its associated costs.

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Determining What You Need As A Lump Sum

Its also useful to understand how much money you need to live a modest or comfortable retirement as a lump sum.

According to ASFA, singles or couples aged 67 need $70,0002 for a modest retirement. This figure assumes you qualify for a full age pension.

For a comfortable retirement, the lump sum estimates are much higher – $545,000 for a single person and $640,000 for a couple, although this also assumes you qualify for a part age pension.3

A different approach is to look at your pre-retirement income and consider how much of it you will need in retirement. Assume, for example, you will need 65 per cent of your pre-retirement income, so if you earn $50,000 now, you might need $32,500 in retirement.

Staying On Track With Benchmarks

Once you set a retirement savings amount based on one of these guidelines, aim to save enough to meet that goal.

The U.S. Department of Labor Savings Guide provides Worksheet 4 to help you find out the percentage of income youll need to save each year to meet your goal. The worksheet takes you through four steps:

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Boost Your Confidence With A Personalized Plan

To get back to your question, I think it’s okay to use the 70-80 percent guideline if you’re pretty far from retirement and only looking for an approximation. Using a higher percent guideline is better if you’re more conservative. Either way, the closer you get to retirement the more specific you need to be.

To me, the key to confidence is to plan ahead. Recent research by the Employee Benefit Research Institute found that only 42 percent of people had actually tried to calculate how much they’ll need to save to live comfortably in retirement. And that’s where the uncertainty comes in. On the positive side, Schwab’s 2019 Modern Wealth Survey found that 56 percent of people who were planners felt “very confident” they would reach their financial goals compared to only 17 percent of non-planners.

So to really understand how much retirement income you’ll need, dig into the details. Plug some numbers into a retirement planning calculator. Consider talking to a financial planner who can help you with how much you can spend, discuss how inflation and taxes come into the picture, and put together some “what if” scenarios based on your personal situation.

Have a personal finance question? Email us at [email protected]. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

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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Your Situation Is Unique

General guidelines cant factor in things like your risk tolerance, size of your family, or your lifestyle. These are unique to you. So bottom line, to understand how much you will need to have a comfortable retirement, you have to get specific.

Start by doing a sample budget. You might divide it into three categories: needs, wants and wishes. Needs are the things you can’t do without like housing, everyday living, health care, insurance and taxes. Wants are the nice-to-haves like travel and nights out. Wishes are where you can let yourself goinclude all the things you’d do if you had unlimited time and money. Now it’s up to you to decide what’s realistic.

With your lists in front of you, add up your sources of reliable retirement income: Social Security, a pension, or income from an annuity. Your savings will have to make up any difference between the total of your income and your spending.

The percentage of income you need to replace in retirement to cover your projected expenses is also a function of how much discretionary income you have. If money is tight and you use most of your income to cover essentials, chances are you’ll have to replace a larger percentage of that income in retirement just to get by. If, on the other hand, you’ve had the good fortune to have a fair amount of discretionary income, you may have more latitude in deciding how you might cut back in retirement and consequently replace a lower percentage.

Saving For Retirement In Your 40s

A lot can happen in your 40s. You may be itching for a career change, or might find yourself settling into a more senior role with a higher salary. Either way, your 40s are a time to keep your debt to a minimum and your savings at a maximum. If a career shift or new business venture is in your plans, cash savings outside of your retirement accounts can fund your dreamskeep your retirement money hard at work.

Emergency fund: Do a check-in and make sure that you still have at least six months of living expenses saved, especially if youve bought a house or started a family.

Additional savings: Keep using a taxable brokerage account to invest additional savings.

Educational savings: Keep contributing to your educational savings plans for your kids.

Retirement savings: Review your contribution percentage annually, especially if your compensation has significantly increased. By the time you turn 50, aim to have six times your current annual salary in retirement savings.

Catch-up tips: If youre feeling behind in your savings, review your expenses and see where you can cut back. Each month, save any extra money in your IRA or emergency fund to further protect your retirement savings. You could also consider a side hustle to bring in some extra cash to boost your savings.

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