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 a year can expect Social Security to replace 35% of their income. But someone earning $300,000 a 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.
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:
When You Plan To Retire
The age you plan to retire can have a big impact on the amount you need to save, and your milestones along the way. The longer you can postpone retirement, the lower your savings factor can be. That’s because delaying gives your savings a longer time to grow, you’ll have fewer years in retirement, and your Social Security benefit will be higher.
Consider some hypothetical examples . Max plans to delay retirement until age 70, so he will need to have saved 8x his final income to sustain his preretirement lifestyle. Amy wants to retire at age 67, so she will need to have saved 10x her preretirement income. John plans to retire at age 65, so he would need to have saved at least 12x his preretirement income.
Of course, you can’t always choose when you retirehealth and job availability may be out of your control. But one thing is clear: Working longer will make it easier to reach your savings goals.
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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Focus On Spending Not Income
It’s wise to base your retirement projections on your level of spending, not on your income.
The Bureau of Labor Statistics saw a 5.4% increase in income and a 7.8% increase in expenditures in its 2019 consumer report, before the financial effects of the 2020 pandemic. Transportation expenditures saw the largest percentage increase, with a 10.1% rise. Spending on entertainment dropped by 4.2%, and spending on personal insurance and pensions fell by 1.8%.
Your spending in retirement will most likely not be the same as your spending today. You might not have a mortgage payment at that point in time. Your children may be grown and living on their own, so you’ll no longer have to support them. Costs related to your work, such as childcare, business attire, and commuting costs, will also go away.
But you’ll incur other costs that you may not have to support today. Out-of-pocket prescription and medical costs might become a bigger concern. You may also want to outsource home-related tasks that you currently do yourself, such as cleaning gutters, raking leaves, or shoveling snow. You may choose to travel more or use your retirement to explore hobbies that you couldn’t pursue during your working years.
The Power Of Compound Returns
The earlier you start saving for retirement, the less youll need to save each month. You can thank compounding, which is basically the returns you make on returns. Once youre making money on your earnings, your returns compound at an accelerated rate.
Suppose you want to retire at age 60 with $2 million and that you get average returns of 10%. Thats slightly less than what the S& P 500 index has delivered before inflation over the past 60 years with dividends reinvested.
Heres what youd need to invest, between your own contributions and your employers match, if you have a $50,000 annual salary.
- If you started investing at 20: Youd need to invest $316.25 per month, or 7.6% of your salary.
- If you started investing at 30: Youd need to invest $884.76 per month, or 21.2% of your salary.
- If you started investing at 40: Youd need to invest $2,633.76 per month, or 63.2% of your salary.
The examples above show not only how much more youll have to contribute to your 401 each month if you start saving later, but also how much more youll have to save overall. In the first example, youd invest just under $152,000 total by starting at 20. But if you didnt get started until 40, youd wind up investing more than $632,000 to reach your goal.
Keep in mind that 10% is an average, not the 401 rate of return you should expect every year. Your returns will vary, based on how your investments perform, along with the risk tolerance you indicate when you choose your investments.
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What Percentage Of Your Salary Should Go Toward Retirement
How much money you need to be financially comfortable during retirement varies widely depending on the individual, and while it can be difficult to forecast exactly what youll need during retirement, there are benchmarks to aim for.
The ideal savings rate varies by expert or study because making plans for the future depends on many unknown variables, such as not knowing how long youll be working, how well your investments will do, or how long you will live, among other factors. Any calculation for retirement is usually an educated guess. However, it is possible to follow some key rules, starting with the assumption you will have a steady income stream until age 65.
Learn More About Retirement Accounts At Vanguard
We offer several types of accounts you can use to save for retirement. Figure out which one is right for you.
For more information about Vanguard funds or ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus read and consider it carefully before investing.
All investing is subject to risk, including the possible loss of the money you invest.
When taking employer plan withdrawals before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
Vanguard Digital Advisor’s services are provided by Vanguard Advisers, Inc. , a federally registered investment advisor. VAI is a subsidiary of VGI and an affiliate of VMC. Neither VAI nor its affiliates guarantee profits or protection from losses.
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What About If I Retire Early
If you plan on retiring early, you may want to put a portion of your savings into an alternate savings account. You will be penalized if you begin withdrawing from your IRA before you are 59 1/2. If you plan to retire before then, you will need to plan carefully and make investments you can use without accessing that account. Your retirement age for Social Security will be closer to 70, and so you will not be able to use that money if you retire early either. You should talk to a financial planner, who can help you find the best ways to invest some of your money so you can access it before you reach the retirement age requirement for your retirement savings. You should look for investments that will generate a steady income flow either through dividends or other means. As you grow closer to reaching your early retirement goal, you will want to switch to more conservative investments so that your money stays safe.
How Much Money Do You Need To Save For Retirement
Saving is just one part of being financially prepared to retire. Another big step is to figure out if youre saving enough to cover what may be decades of expenses. However, fewer than half of workers know how much income theyll need each month in retirement.* How much you should save and how you invest depend on how many years you have before retiring.
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Make The Most Of Each Year
When it comes to saving for retirement, every year counts and can make a big difference. By starting as soon as possible, you take advantage of the exponential return on your savings over time, thanks to compound interest. It’s a simple way to reduce your effort and let time work for you.
For example, someone contributing $5,000 per year for 25 years will accumulate nearly $188,000 with a 3% return. However, by starting just five years later, they will accumulate $138,000 and just over half the return .
In addition to saving each year for retirement, you must ensure that you earn a good return. For example, a 6% return on annual savings of $5,000 over 25 years can help you earn over $32,000 without any extra effort. A simple 1% increase can change everything! That’s why it’s important to avoid high management fees and compare the return on your savings to the annual inflation calculated by the Bank of Canada. This ensures that you’re on the right track.
The best strategy to have the retirement you’re dreaming of is to start saving for it as soon as you can. That way, you will know how much you need to save and make it part of your everyday financial life. Enjoying life now while saving money for your future is the best possible solution!
Saving For Retirement In Your 60s
Retirement is around the corner in your 60s, and the times almost come to enjoy the money youve worked so hard to save. Consider shifting to capital preservation and income-generating investment strategies. These fixed income investments tend to be stable bonds or fixed annuities aimed to keep the money youve saved over the years safe.
As youll most likely be entering the last of your full-time working years, youll want to keep saving as aggressively as you can.
Emergency fund: Consider upping your cash savings to one years worth of living expenses, so you have more cash on hand for things like medical expenses.
Additional savings: Review your risk tolerance and investment strategy with an eye toward capital preservation. Financial advisors may be particularly helpful now in helping you figure out how to handle the asset allocation of your retirement funds.
Educational savings: If you have children still in college or grandchildren whose college youd like to help out with, you can continue contributions to 529 accounts.
Retirement savings: Make sure youre contributing as much as you can before you retire. By the time you turn 67, you should have 10 times your annual salary in retirement savings.
Catch-up tips: Even after retirement, there are always part-time jobs that can supplement your income as you adjust to living on your savings and Social Security income.
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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
| Year | |
|---|---|
| 2016 | $129.92 |
Bank of Canada Inflation Calculator. The average rate of inflation in Canada between the year 2000 and 2014 was 2.00%.
The Matching Contribution Bonus
For people who start saving early and take advantage of employer-sponsored plans, such as 401s, hitting savings goals isnt as daunting as it may sound. Employer matching contributions could significantly reduce what you need to save per month. These contributions are made pre-tax and it’s the equivalent of “free money.”
Say you save 3% of your income during a year and your company matches that 3% in your 401, “you will make a 100% return on the amount you saved that year,” said Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Mass.
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Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.
What Is A Realistic Retirement Income
As mentioned above, the amount of money youll need to retire depends on your individual circumstances. What works for some people might not be enough for others.
During retirement, your earnings will likely come from a combination of Social Security payments and withdrawals made from employer-sponsored retirement plans and IRA accounts. The more youre able to contribute to those accounts during your working years, the more youll have to rely on during retirement. The amount youll need will vary, but experts generally recommend being able to replace about 80 percent of your salary during retirement.
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Set Your Financial Goals
To figure out how much to save for retirement, many people rely on two infamous rules of thumb. The first recommends that you save 10% of your gross salary every year. The second stipulates that you should save enough to enjoy 70% of your salary every year upon retirement. This rule takes after the money you earn from defined benefit pension plans, and assumes that your needs wont be as significant when you retire, even though this isnt always the case.
These rules can help you set objectives, especially if youre young and your retirement projects arent very clear yet. Once your professional situation is stable and you have a better idea of what your goals are, we recommend refining your calculations. These estimates are too vague to adequately plan for your retirement and dont take into account your retirement projects.
So, how much should you save for your retirement?
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
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Basing Your Needs On Current Income
Using current income to forecast retirement needs isn’t helpful for people who are in the early stages of their careers. You’re likely earning an entry- or mid-level income in your field if you’re in your twenties or thirties. Your income might drop for a while if you make a career change, and that would affect your savings formula. It becomes hard to project the amount you’ll need during your senior years if you’re unsure what your pre-retirement income will be over the years.
But How Much Is Enough
Our guideline: Aim to save at least 15% of your pre-tax income1 each year, which includes any employer match. That’s assuming you save for retirement from age 25 to age 67. Together with other steps, that should help ensure you have enough income to maintain your current lifestyle in retirement.
How did we come up with 15%? First, we had to understand how much people generally spend in retirement. After analyzing enormous amounts of national spending data, we concluded that most people will need somewhere between 55% and 80% of their preretirement income to maintain their lifestyle in retirement.1
Not all of that money will need to come from your savings, however. Some will likely come from Social Security. So, we did the math and found that most people will need to generate about 45% of their retirement income from savings. And saving 15% each year, from age 25 to age 67, should get you there. If you are lucky enough to have a pension, your target savings rate may be lower.
Here’s a hypothetical example. Consider Joanna, age 25, who earns $54,000 a year. We assume her income grows 1.5% a year to about $100,000 by the time she is 67 and ready to retire. To maintain her preretirement lifestyle throughout retirement, we estimate that about $45,000 each year , or 45% of her $100,000 preretirement income, needs to come from her savings.
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