% And 15% Savings Rates
Keeping the above assumptions about her salary and expectations, a 10% savings rate yields Beth $847,528 at age 67. Her projected needs remain the same at $1.3 million. So even at a 10% savings rate, Beth misses the amount of her preferred savings.
If Beth pumps up her savings rate to 15%, she will reach the $1.3 million amount. Adding in anticipated Social Security, her retirement will be funded.
Does this mean that individuals who dont save 15% of their income will be doomed to a sub-standard retirement? Not necessarily.
Use Your Current Income As A Starting Point
It’s common to discuss desired annual retirement income as a percentage of your current income. Depending on whom you’re talking to, that percentage could be anywhere from 60% to 90%, or even more. The appeal of this approach lies in its simplicity, and the fact that there’s a fairly common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you’ll no longer be liable for will, theoretically, allow you to sustain your current lifestyle.
The problem with this approach is that it doesn’t account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100% of your current income to get by. It’s fine to use a percentage of your current income as a benchmark, but it’s worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.
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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If You Have A Sipp Consider Setting Up Regular Investing
This way, your contribution will be automatically split between a range of investments designated by you and in the proportions you choose, so you don’t have to go in and manually choose your investment allocation every time you make a contribution.
Setting up regular investing can help minimise the risk that your contribution is sitting in cash for longer than necessary and is being put to work in the market.
How Much Money To Withdraw From Retirement Accounts
You have built a good size nest egg to live off it in retirement. After you retire and stop receiving the paycheck from your employer, you will start spending your retirement savings to cover the expenses. You need to be careful about how to withdraw money from your retirement savings.
The popular rule of thumb is 4 percent or safe withdrawal rate.
Its recommended by many financial planners and advisers. There are many debates between financial professionals if 4 percent is safe enough. Some of them recommend to reduce it to 3 or 3.5 percent. The main idea is you should be able to withdraw 4 percent of your portfolio value without ever depleting it to a dangerous level.
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How Do You Minimize Taxes In Retirement
The best way to minimize taxes in retirement is by planning ahead. Ideally, you would meet with a financial advisor who specializes in retirement planning well before your retirement date. A retirement planner can help you strategize about the vehicles you’ll use to fund your retirement and minimize taxes. It doesn’t hurt to consult a professional for advice even if you’re close to retirement, or already retired.
Look For Factors That Can Build In Flexibility
Once you have a broad sense of your potential income and expenses in retirement, think about what adjustments you might make to increase income, reduce expenses and alleviate stress. For example, selling your home and moving to a low-maintenance condo or senior living community could help you add to your nest egg, reduce your monthly housing costs and/or eliminate some of the worry over home repairs and maintenance. Alternatively, consider paying off your mortgage before you retire to lower your monthly expenses.
Would you enjoy an encore career? Whether you continue doing your current job on a part-time basis or find a new, low-pressure position doing something you love, working for a few more years can put extra income in your pocket and help your retirement savings go farther.
Some spending may naturally decrease over time. You may travel less as you age. You and your spouse may decide you only need one caror the cars you have will last longer because you no longer commute. Clothing, dry cleaning, expensive meals out and any number of miscellaneous expenses may not be the spending priorities they are during your working years.
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Tips For Using Your Projected Retirement Income
So what do you with your rough estimate of your retirement income needs? First, you see how much of that need will be filled with guaranteed income sources. You can get an estimate of your Social Security payments by creating a my Social Security account at www.ssa.gov.
The Alliance for Lifetime Incomes 2019 Protected Lifetime Income Study found that 63% of Americans had no source of protected lifetime income, such as a pension or annuity, besides Social Security. The study polled a representative sampling of 3,119 U.S. adults ages 25 to 74.
If youre one of that 63%, you could tap your savings to cover the gap between what youll need to live on and what your your Social Security check brings in. The standard rule of thumb for a 30-year retirement is to have 25 times your anticipated annual expenses saved up by the time you retire. Then you can safely withdraw 4% of your nest egg each year with only a small chance of your money running out.
Some financial advisors recommend buying a simple income annuity to cover part of your funding gap. Since annuity payments continue for life, this strategy removes some of the guesswork in retirement income planning, such as predicting how long youll live. Research also suggests it gives people peace of mind.
What Is Pound Cost Ravaging
Find out ways to dodge this nasty trap here, including halting or varying withdrawals.
If you are drawing an income from your pension and are considering withdrawing more than usual to cope with rising living costs, check whether your new withdrawal rate is sustainable.
If not, consider reverting back to a lower amount if and when costs ease up a bit.
You don’t need to keep withdrawing the same amount from your pension every year and many people need less as they get older.
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Calculate The Balance Between Income And Expenses
Finally, you collected all the information and have the full financial picture in front of you:
- Inventory of all your assets
- Your retirement income
- Your calculated expenses
The next step will be to calculate the balance between your income and expenses.
Did you find out that you have an income gap in your future budget? If yes, how do you cover it?
Here is a simple example.
You are planning to spend in retirement $5,000 a month .
Your guaranteed income from Social Security and/or pension is $4,000 a month .
$5,000 $4,000 = $1,000
Based on the calculations you have an income gap of $1,000 a month
Begin With Your Current Income
Planning for anything requires you to have at least something of a baseline to work from, which is especially true when it comes to your financial future. In this scenario, you can use your current income as a jumping-off point. The most simplistic way to project retirement income needs is to take a percentage of your current income that you believe youll need to get by once you are no longer workingtypically 60-90 percent.
While many people like this method because its so straightforward, it doesnt take into consideration the entire picture. Perhaps youd like to travel more after retirement, for example, in which case you might actually need more money than youre currently bringing in. Use your current income as a benchmark, but dont treat it as a rule.
Impact Of Inflation On Retirement Savings
Inflation is the general increase in prices and a fall in the purchasing power of money over time. The average inflation rate in the United States for the past 30 years has been around 2.6% per year, which means that the purchasing power of one dollar now is not only less than one dollar 30 years ago but less than 50 cents! Inflation is one of the reasons why people tend to underestimate how much they need to save for retirement.
Although inflation does have an impact on retirement savings, it is unpredictable and mostly out of a person’s control. As a result, people generally do not center their retirement planning or investments around inflation and instead focus mainly on achieving as large and steady a total return on investment as possible. For people interested in mitigating inflation, there are investments in the U.S. that are specifically designed to counter inflation called Treasury Inflation-Protected Securities and similar investments in other countries that go by different names. Also, gold and other commodities are traditionally favored as protection against inflation, as are dividend-paying stocks as opposed to short-term bonds.
Our Retirement Calculator can help by considering inflation in several calculations. Please visit the Inflation Calculator for more information about inflation or to do calculations involving inflation.
Easy Steps To Calculate Your Retirement Income Gap
Millions of women approaching retirement age have nothing saved up and depend on Social Security alone. Other women are worried of what will happen to them because they will retire with a small balance in their retirement account.
If you are a reader of this blog, it means you take preparing for retirement seriously and want to learn more on the topic.
When I think about planning for retirement I think about it like assembling the financial pieces of the puzzle. It takes time before everything fit into the right places and you can see the whole picture.
The important part of this process is to calculate your retirement income and expenses and see if you have a gap between them.
Why identifying an income gap is important?
When you retire, you can no longer count on a paycheck from work. You will start relying on a fixed income, such as Social Security or pension. But the income from these sources may not be enough to cover all your regular expenses.
That will leave you with the gap between income and expenses. In this situation, you will depend on money from your savings and retirement accounts to cover the expenses.
Lets find out how much is your income gap in 5 easy steps.
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When Should I Retire
It depends. The AARP Retirement Calculator will help you decide. If you plan on retiring early, however, you’ll need a lot of money. In most cases, you cant tap tax-deferred retirement plans without a 10 percent penalty until the year you turn 59 ½. You cant get Medicare until youre 65, and your money will have to last much longer than someone who retires at that age. Here are other factors to consider:
Although you can start collecting this benefits at 62, it will be reduced unless you retire at full retirement age, which is 67 for those born in 1960 or later. Your benefit increases by 8 percent each year you delay taking the benefit after full retirement age, until you turn age 70.
Social Security benefits are adjusted annually for inflation. Thats a big plus and one that makes waiting to collect worthwhile. Nevertheless, if youre in poor health or have large savings, the time off from work may be worth missing the extra money from the Social Security Administration . You can use the AARP Retirement Calculator and the AARP Social Security Calculator to see how much you would get from Social Security by retiring at different ages.
You may be planning to retire at 70, but your body may have other ideas. And if you decide to retire before 65, be sure to include the cost of private health insurance in your calculations.
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Bridging The Gapto Financial Wellness
Your retirement gap is the difference between the income you’ll need during retirement and the income you’ll receive from your pension.
Identifying your gap and having a plan in place to close that gap are part of building a secure retirement. OPERS provides the foundation and will be your partner on your path to financial wellness.
To determine your gap you need to consider your spending habits while working and what that will look like in retirement, factoring in inflation.
Review Your Current Financial Situation
You need to see where you are right now and what do you have. Take an inventory of all your financial assets.
Start by collecting all your financial information:
- How much is the current value of your house?
- How much do you have in your retirement accounts, 401, IRA, Roth IRA?
- How much do you have in your investment accounts?
- How much is the current value of your rental property or vacation house ?
- How much is the value of your collectibles, gold coins, if you have any?
If you want to know the current value of your house, useZillowfor anapproximate estimate.
Recently we refinanced our mortgage and it came with an appraisal report. I use this estimate as the approximate value of our house. You can ask the local real estate broker to give you the most current evaluation of your home, your rental property or a beach house if you have any.
Put all this information in the Excel spreadsheet or just use a piece of paper and call it Financial Assets Category.
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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.
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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