How To Estimate Retirement Income Needs

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How To Tailor The Rule Of Thumb

How to calculate retirement income needs.

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.

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There are two broad types of expenses that you will need to cover in retirement: basic needs and discretionary needs.

  • Basic needs: Basic needs are your necessitiesongoing, non-discretionary expenses like food, shelter, transportation, health care, and other essentials. You should look to cover these expenses first through consistent sources of income, such as Social Security, and pensions.
  • Discretionary needs: The retirement lifestyle you choose may include activities that are important to you, but not essential such as travel or entertainment. Your consistent income sources may not be sufficient to pay for your basic needs and discretionary expenses. Plan on paying for these discretionary expenses with other sources of income so that adjustments can be made to your budget as fluctuations occur.

What Is The Full Retirement Age

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Your retirement age can have a direct effect on your retirement resources how much money you have to live on after you throw in that work towel. Most people wait until what Uncle Sam defines as the “full retirement age,” which is the age you become eligible to start receiving your full Social Security benefits.

» Find out how you can increase your social security benefit

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Savings Rates: What’s Enough

While it’s good to have a dollar amount as your long-term savings goal, it’s helpful to focus on how much you should sock away each year.

Ten percent is the historical recommended savings rate. Schwab further refines that to say that if you start in your 20s, you can retire comfortably with a 10% to 15% savings rate. Here’s how a few scenarios could play out for a future retiree.

Plan For 80% Of Your Current Income In Retirement

Taxes In Retirement

It can be hard to imagine exactly how much you’ll need every year after you retire. Financial advisor Hutch Ashoo of Pillar Wealth Management said a good rule of thumb is to expect you’ll need 80% of your current income every year if you want to maintain your standard of living.

This formula is based on the premise that you’ll be able to eliminate some of your expenses after you retire.

“You’ll no longer need to save for retirement, and you’ll likely spend less on transportation and other work-related expenses,” says Ashoo.

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What Are Your Retirement Lifestyle Expectations

Ultimately, how much money you’ll need for your own retirement is very personal, and will depend on your own situation, wants, needs and lifestyle expectations. It may help to factor in your day-to-day spending habits, your recreational activities and hobbies and whether youll be entering retirement debt-free. The following figures are a guide taken from the ASFA retirement standard.4

Multiply Current Annual Spending By 25

Here’s a broad rule of thumb that you can use to figure out how much money you’ll need when you retire. Multiply your current annual spending by 25. That’s what your savings will have to be in retirement to allow you to safely withdraw 4% of that amount every year to live on.

You’ll need an investment portfolio that’s 25 times $40,000 a year$1 million at the start of your retirementif you spend $40,000 per year now. This sum allows you to withdraw 4% in your first year of retirement, and that same 4% adjusted for inflation every year going forward. You’ll maintain a decent chance that you won’t outlive your money.

You could amass a $1 million portfolio even on a salary of only $30,000 to $40,000 if you begin saving at an early age, as early as your twenties.

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Know What You’ll Need To Live Comfortably

Putting away your money for retirement can sometimes feel like you’re aiming at a moving target. How much should you be putting away right now? How can you know when you have enough?

One of the biggest mistakes that many retirees make is underestimating how much they will need to spend in retirement to have a comfortable lifestyle. They end up overspending, because they didn’t plan ahead or didn’t know how.

It’s a much easier task when you have an idea of how much you will need to maintain your standard of living. To determine how much money you will need to retire, you must estimate your retirement expenses. This is something you can do in a few simple steps.

How You Want To Live In Retirement

What is the Amount of Income you Need During Retirement?

In other words, do you expect your expenses to go down when you retire? We call that a below-average lifestyle. Or will you spend as much as you do now? Thats average. If you expect your expenses will be more than they are now, thats above average.

How do you know how much money is enough to last through your golden years? The answer is highly personal and depends on your lifestyle and spending habits, but there are a few basic guidelines to follow if you want to retire comfortably.

Now lets determine how much savings youll need to retire. After youve figured out how much income youll need to generate from your savings, the next step is to calculate how large your retirement nest egg needs to be in order to be able to produce this much income in perpetuity.

People live an average of 20 years after retirement in Malaysia.

2 Simple Ways to Determine How Much You Need in Retirement

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Make Up Any Income Shortfall

If you’re lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you’ll come up short? Don’t panic â there are probably steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:

  • Try to cut current expenses so you’ll have more money to save for retirement
  • Shift your assets to investments that have the potential to substantially outpace inflation
  • Lower your expectations for retirement so you won’t need as much money
  • Work part-time during retirement for extra income
  • Consider delaying your retirement for a few years

A community bank is a great resource for consumers and businesses to learn about financial planning. Our can offer insight and ideas to help you pursue both short and long-term objectives. For more information or to set up an appointment for a no obligation, complimentary and confidential financial review, call 866-224-1379 or visit any of our office locations.

Working Out Your Estimated Needs

Based on your projected retirement lifestyle, try to work out how much you will need per month when you retire.

If your estimate looks challenging to save up for, do explore a more cost-effective lifestyle.

As a benchmark, a typical retiree household in a 3-room flat spends an average of $1,000 a month*. As a rule of thumb, you could consider a spending benchmark of roughly two-thirds of your last drawn monthly salary.

Work out how much you need and then estimate in more detail how ready you are for retirement.

*Based on the most recent results of the Household Expenditure Survey 2012/2013

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Am I Eligible For Old Age Security

Eligibility for Old Age Security depends on how much income you earn. The default value in the calculator is the 2019 maximum monthly payment regardless of your marital status. You can check the latest Old Age Security payment amounts to find out exactly how much money you’ll receive – and add it to the calculator for more accuracy.

Canadian Retirement Income Calculator

How to estimate retirement corpus

The Canadian Retirement Income Calculator will provide you with retirement income information. This includes the Old Age Security pension and Canada Pension Plan retirement benefits. To estimate your retirement incomes from various sources, you will need to work through a series of modules. You will then need to compare them to your goal income. It also allows you to see the impact of the changes you make in how you save.

If you are married or living in a common-law relationship, you must each use the calculator separately and compare your results to understand your overall situation. It is also important for couples to know how a partner’s death or the end of the relationship could affect their financial situation.

The calculator’s results are estimates. You should not use them for financial planning.

The calculator does not collect personal information or identifiers.

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Now Youre Ready To Use The Replacement Rate To Help You Plan

Youll notice that the chart breaks down the replacement rate into income sources. Understanding the income youll need from sources other than Social Security can help you estimate a savings level to aim for before you retire. At higher income levels, the net effect is that Social Security benefits make up a much smaller percentage of the total income replacement rate meaning more savings or other income sources would be needed to fund retirement.

How Much Money Do You Really Need To Save For Retirement

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So How Much Income Do You Need

With that in mind, you should expect to need about 80% of your pre-retirement income to cover your cost of living in retirement. In other words, if you make $100,000 now, you’ll need about $80,000 per year after you retire, according to this principle.

The idea is that once you retire, you’ll be able to eliminate certain expenses. You’ll no longer have to save for retirement , and you might spend less on commuting expenses and other costs related to going to work.

Now, this retirement withdrawal strategy isn’t perfect for everyone, and you might want to adjust it up or down based on the type of retirement you plan to have and if your expenses will be significantly different.

For example, if you plan to travel frequently in retirement, you may want to aim for 90% to 100% of your pre-retirement income. On the other hand, if you plan to pay off your mortgage before you retire or downsize your living situation, you may be able to live comfortably on less than 80%.

Let’s say you consider yourself the typical retiree. Between you and your spouse, you currently have an annual income of $120,000. Based on the 80% principle, you can expect to need about $96,000 in annual income after you retire, which is $8,000 per month.

Income And Percent Of Income To Save

How to Determine Retirement Income Needs (GoodFinancialCents.com)

Deciding what percentage of your annual income to save for retirement is one of the big decisions you need to make when planning. If youre just starting out on your retirement planning journey, saving any amount is a great way to begin. Just keep in mind that youll need to keep increasing your contributions as you grow older.

So how much is enough? Financial services giant Fidelity suggests you should be saving at least 15% of your pre-tax salary for retirement. Many financial advisors recommend a similar rate for retirement planning purposes.

But even then, the 15% rule of thumb assumes that you begin saving early. It also assumes youd be comfortable replacing 55% to 80% of your pre-retirement income. If you start later or expect youll need to replace more than those percentages, you may want to contribute a greater percentage of your 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%.

If You Got A Late Start With Saving

Don’t despair if you start saving later in life. The best way to make up for getting a late start is to save harder.

The older you are, the more you should be saving and diversifying for retirement each month. Don’t over allocate a portion of your savings to stocks with the thought that you need riskier investments to make up for lost decades of savings. Risk cuts both ways. You won’t have as much time to bounce back if your investments suffer.

Use index funds. Look for low-fee funds. Spread your money between a mix of stocks and bonds. Keep doing this through the rest of your working career with the goal of saving 25 times your current level of spending by the day you retire.

Use a retirement calculator to make sure you’re on track. Ignore scary headlines in the financial news. You’re playing a long-term game. Getting caught up in the daily ups and downs of the market will only curb your progress.

Focus on ways that you can either boost your income or lower your expenses if you’re getting a late start saving for retirement. Doing a combination of both is ideal.

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Next You Can Tailor The Rule Of Thumb To Fit Your Needs

There are several reasons the 75% starting point may not be right for you. First, the initial savings and spending assumptions may not be appropriate. For example, you may be saving closer to the 15% we recommend for retirement. Fortunately, our analysis found that this is a pretty easy adjustment to make. Every extra percentage point of savings beyond 8%, or spending reduction beyond 5%, reduces your income replacement rate by about 1 percentage point. Think of these adjustments as a nearly one-to-one ratio.

So, if youre saving 12% of your income instead of the 8% we assumed, take your replacement rate of 75% and subtract 4 percentage points, resulting in a personally adjusted estimate of around 71%.

Next, the way youve saved for retirement also affects the replacement rate. The 75% starting point assumes all savings are pretax like a traditional 401 or IRA. Thats a conservative assumption, since 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, which means if you have a large proportion of your retirement savings in Roth accounts, your income replacement rate should be lower.

Third, 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.

If You Want To Invest The Cash

How to Estimate Your Retirement

Nowhere does it say you’re required to spend the money you get from Social Security. You can invest it in stocks, bonds, real estate or whatever.

One investment-related thing you cannot do with Social Security money is count it as “earned income” to qualify for contributions to an IRA. However, you can still invest via a regular taxable account. Just remember that in the short term, some investments can be very volatile and not appropriate for any cash you know you’ll need in the near term . Weigh that against the guaranteed return you would get on your money by waiting to file and amassing more delayed retirement credits.

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