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.
How Much Money Do I Need To Retire At 55
If your goal is to retire at age 55, Fidelity recommends that you save at least seven times your annual income. That means if your annual income is $70,000 a year, you need to save $490,000. But remember, this is only an estimate it doesnt consider your unique goals and other unknown variables, like future medical expenses and your life expectancy.
Also, keep in mind that there are benefits to waiting to retire. For example, those born between 1943 and 1954 can take 100% of any Social Security benefits you qualify for if you wait until your full retirement age at 66. And the longer you wait, the more the benefits increase up to 132% if youre 70 or older.
If you expect to receive a pension, waiting could increase the percentage of your salary you receive during retirement. The amount will likely depend on certain factors, like your years of service and income. Youll have to contact your benefits department for specifics.
In addition, waiting until youre 59½ to withdraw money from a Roth or Traditional Individual Retirement Account will give you access to your funds without penalty.
Waiting also allows you to add more catch-up contributions additional funds investors who are at least 50 years old can add to certain funds, including IRAs, 403s and 401s.
To estimate how much money you need to retire by a certain age, use our retirement calculator.
Example: How Much You Need To Save Each Month If You Start To Save For Retirement Early
Suppose you plan to retire in 20 years. You want to save $75,000 for your retirement. You’re earning an annual interest rate of 5% compounded on your savings.
Compare how much you’d have to save each month if you start to save now or in 10 years. When you have 20 years to save instead of 10 years, you have to put $14,160 less into the bank to reach your goal. This is because you earn more money in interest the longer you save. In this example, you earn $14,020 more in interest when you have 20 years to save than when you have 10 years to save.
|Years you have to save||How much you need to save per month||Amount saved|
Note: the numbers are calculated using the Ontario Securities Commissions Compound Interest Calculator.
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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.
Pensions 401s Individual Retirement Accounts And Other Savings Plans
401, 403, 457 Plan
In the U.S., two of the most popular ways to save for retirement include Employer Matching Programs such as the 401 and their offshoot, the 403 . 401s vary from company to company, but many employers offer a matching contribution up to a certain percentage of the gross income of the employee. For example, an employer may match up to 3% of an employees contribution to their 401 if this employee earned $60,000, the employer would contribute a maximum of $1,800 to the employees 401 that year. Only 6% of companies that offer 401s dont make some sort of employer contribution. It is generally recommended to at least contribute the maximum amount that an employer will match.
Employer matching program contributions are made using pre-tax dollars. Funds are essentially allowed to grow tax-free until distributed. Only distributions are taxed as ordinary income in retirement, during which retirees most likely fall within a lower tax bracket. Please visit our 401K Calculator for more information about 401s.
IRA and Roth IRA
In the U.S., pension plans were a popular form of saving for retirement in the past, but they have since fallen out of favor, largely due to increasing longevity there are fewer workers for each retired person. However, they can still be found in the public sector or traditional corporations.
For more information about or to do calculations involving pensions, please visit the Pension Calculator.
Investments and CDs
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Average American Retirement Income Statistics
What is the average and median retirement income for Americans? Lets find out!
7. Households aged 5559 have a mean retirement income of $118,061.
According to the US Census Bureau, the mean retirement income for people aged 5559 seems quite high. Again, it is important to remember that the median is a better indicator.
And the median retirement income for this age group is $81,512. We should also note that the amount is linked to households, not individuals.
8. The average amount of retirement income for households aged 6064 is $100,842.
The median for households aged 6064 is $70,031 an even lower amount compared to the previous age group. As for the average retiree income, it was calculated to be $100,842.
9. Households aged 6569 have a mean income of $88,291.
The majority of older adults have little or no savings or income. In fact, according to the Pensions Right Centre, half of Americans that are 65 or older have less than $24,224 in retirement income.
The average retirement income for households between the ages of 65 and 69 is $88,291. The median, however, is significantly lower $60,324.
10. Households Aged 7074 have a retirement income averaging at $79,344.
11. The mean retirement income for households older than 75 is $58,644.
The median income for those older than 75 is $37,335. This amount is more than two times lower than that of households aged 5559.
What is the average retirement income? Which amount should we take into account?
Use Your Salary As Your Guide
Retirement account brokerage firm Fidelity Investments uses a savings factor system to help a person determine how much to save for retirement based on his or her age. This system requires a person to multiply his or her current income based on an age-specific savings factor.
According to Fidelitys savings factor system, heres how much an individual should have already saved for retirement at various points between the ages of 30 and 67:
Age 30: 1x salary.
Age 60: 8x salary.
Age 67: 10x salary.
To better understand Fidelitys savings factor system, lets consider a 40-year-old who earns an annual salary of $50,000. Based on Fidelitys savings factor system, a 40-year-old should try to have $150,000 or approximately 3x his or her annual salary already saved for retirement. However, if a 40-year-old has less than $150,000 in retirement savings available, this individual may need to play catch-up to ensure he or she is prepared financially for retirement.
Fidelitys savings factor system is just one of several tools available to help people plan for retirement. Other common retirement planning tools include:
The tools above are designed to help people streamline their retirement planning and maximize their retirement savings. But it is important to note there is no set amount an individual should save for retirement. For those who have yet to start saving for retirement, there is still plenty of time to get the funds you need to live comfortably during retirement.
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Americans And Their Thoughts On Retirement
The following retirement savings statistics show how confident Americans are in their savings and income.
16. Four out of ten workers estimate they will need at least $1 million for retirement.
The 2020 Annual Retirement Confidence Survey by the Employee Benefit Research Institute shows that 48% of workers have tried to calculate how much money they need for a comfortable retirement.
When faced with the question How much should I have saved for retirement?, 39% of those who tried calculated that they will need at least $1 million, joining the ranks of US millionaires. In comparison, one out of three workers felt the same way in 2019 and one in four in 2016.
The rest of the respondents felt they could make do with less than $1 million. In 2019, 14% believed they needed $750,000 to $1 million, compared to 15% in 2020. In 2019 15% of workers calculated they need $500,000 to less than $750,000, while 13% shared the same thoughts in 2020. The remaining respondents calculated that they need less than $500,000.
But how many people have $1,000,000 in savings for retirement? Well, according to a report by United Income, one out of six retirees have $1 million.
16. For 66% of retirees, their personal savings or investments are a major source of income.
17. Seven in ten workers think they will need to work for income in retirement.
18. 44% of workers are very confident that they will be able to live comfortably in retirement.
Ways To Increase Your Retirement Savings
If your current savings aren’t close to that ballpark figure, you’re not alone. A 2021 study by the Federal Reserve found that among 45- to 59-year-olds, 83% had some retirement savings, but only
However, if you’re significantly behind your personal target, consider adjusting your savings strategies.
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Impact Of Inflation On Pensions And Savings
The amount you get from public pensions, like the Old Age Security pension and Canada Pension Plan, is protected against inflation. This means as the cost of living goes up, the value of your benefit goes up as well.
Not all employer pensions are protected against inflation. Ask your pension administrator or employer whether your pension is protected against inflation.
Personal savings and investments, such as mutual funds or guaranteed investment certificates , are usually not directly protected against inflation. Your savings need to grow by at least the rate of inflation. If not, the amount of things your savings can buy in the future will be less than what they can buy now.
For example, something bought for $100 in 2002 would cost $129.92 in 2016. If your income isn’t protected against inflation, you may have a hard time maintaining your lifestyle in retirement as the cost of goods and services increases.
Determine Your Retirement Needs
Everyones retirement goals are different. How much money you need to save depends on your current income and the lifestyle you want during retirement.
Three Common Retirement Savings Goals
Determining your needs and wants is a crucial part of retirement planning and the best way to find a savings goal that works for you.
For many people, certain expenses decrease in retirement. Student loans are paid off and your children are often grown and financially independent. You may be done paying off your mortgage, or close to it. Or you may choose to downsize to a more affordable house or condo.
But while some costs decrease, others may increase.
For example, if you plan to travel extensively in early retirement, you may need 100 percent of your current salary for the first few years instead of 70 percent to 80 percent.
Another factor to consider is your life expectancy. At age 65, the average American life expectancy is between 20 and 22 years and half the population will live longer than that.
Outliving your savings known as longevity risk is a real threat to your nest egg. If youre in good health and plan to live a long life, you need to plan accordingly.
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Look At A Check Point Chart
Another good resources is a check point chart. These charts can be customized to your income and savings needs. You can use the chart to make sure that you are meeting your savings goals over the course of years. It is a good idea to save a particular savings chart and then look back at it as you regularly review your retirement savings.
Tips To Help You Save For Retirement
- A financial advisor can help you build a long-term strategy for reaching retirement. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
- Social Security benefits alone wont be able to support your current lifestyle. However, they can certainly help with your living expenses in retirement. Try our Social Security calculator to see how much of a benefit you can expect.
- While youre at it, check out our retirement calculator to see if your savings are on pace and try our cost of living calculator to get a better idea of your income needs.
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How Should I Invest For Retirement
Financial advisors recommend that your age should guide your retirement investments. When youre younger, choose more aggressive, stock-based investments that may see higher returns. As you get older, shift investments to increasingly conservative, bond-based funds to keep your retirement balance stable.
Your own personal willingness to take on risk should guide how you approach investing for retirement as well. Check out our guide on how to invest for retirement. And if youd prefer to have someone else manage your retirement investments, consider reaching out to a financial advisor or choose a robo-advisor or a target-date fund.
Invest Money As You Eliminate Debt
As you pay off debt, it’s essential to spend money that was going toward debt payments in a way that most benefits you. Once you’ve rid yourself of high-interest debt, reallocate the amount you were spending on debt toward investing for your retirement. If you have multiple debts, try the “debt avalanche” method whereby you focus on repaying the highest-interest debt first while paying minimum monthly amounts for the other debts. Once you repay that debt, you can start focusing on the debt with the next-highest interest rate.
It’s essential not to delay or deprioritize investing at age 35, particularly if you started investing late. You may have missed out on some powerful years of compounding interest, but your money could still grow for 30 or more years.
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Estimate Future Income Needs
Fair warning: This step involves the most work but power through, because the others are a breeze. And if you keep even a loose budget, you already have a leg up. Projecting future income requirements begins by taking a look at current spending.
To do that, enter your typical monthly expenses in the first column of a spreadsheet or jot them on a piece of paper. Then do a little thinking about whether each expense will stay the same, go down, go up or best of all disappear in retirement. In a second column, write your best guess of what each expense will be in retirement.
Add those up, tack on other things you may not budget for now but want to spend money on later travel, golf, mahjong supplies, ballroom dance lessons and you will have a rough idea of your monthly spending needs in the future. Multiply by 12 to get the income youll need each year to meet those expenses in retirement. Compare that to your current income to arrive at whats called a replacement ratio, or how much of your income you should aim to replace in retirement.