Figuring out how to retire is a top priority for many working Americans who dream of a future that is free of deadlines and responsibilities. But there are so many questions to ponder: How much money will you really need? Will Social Security be enough to carry you through? What if you want to walk away from your job by the time you’re 50 or 60?
Here’s the reality: Despite some negative stories in the mass media, most retirees find retirement to be less financially challenging than they expected. In fact, 16 years of annual surveys by polling organization Gallup have consistently found that more than 70 percent of retirees report having enough financial resources to live comfortably. In 2018, that number was 78 percent.
Take a percentage of your income
A generally accepted guideline is that a person needs 70 to 80 percent of his or her preretirement income in order to cover post-employment costs. So, for example, you may ask, “If I earn $55,000 annually, how much money do I need to retire at 65?” Using the 70-to-80-percent rule, you need an income of $38,500 to $44,000 per year to retire. That means in order to fund a 20-year retirement, you would need assets totaling between $770,000 and $880,000. And if you retired earlier or lived longer and needed your savings to stretch for 30 years, you’d require anywhere from $1.16 million to $1.32 million.
Obviously, the amount you need will depend on your particular situation. If you currently spend 90 percent of your paycheck on basic necessities like rent and food, you will probably need to replace more than 80 percent of your working income in order to maintain your standard of living. On the other hand, if you’ve been devoting 30 percent of your income to paying down your mortgage and you get the balance paid off before you retire, you could potentially live comfortably on less than 70 percent of your preretirement earnings.
Calculate your projected expenses
A widely accepted way to determine the amount you’ll need is to calculate your annual expenses and multiply them by 25. By this logic, if you spend $35,000 each year, you’ll need to save $875,000. This ties in to what is known as the four-percent rule, which holds that you should be able to safely withdraw four percent of your savings in each year of retirement (adjusting for inflation) without a significant risk of running out of cash in 30 years. However, the four-percent rule doesn’t work in all situations. For instance, it assumes a certain balance of stocks and bonds and doesn’t account for taxes, investment fees, or lower-than-normal market returns. But historically, it has been shown to be effective.
To determine your spending needs in retirement, take some time to honestly reflect on what you would like to do and what your lifestyle will cost. For example, do you plan to indulge in senior travel? Will you go back to school or take up a new hobby? Are you aiming to help fund your grandchildren’s education? These are all factors you need to consider.
In some ways, your expenses should decrease when you retire. After all, you won’t be spending money on work clothes or commuting costs, your mortgage may be paid off, your children may have left the nest, you won’t be saving for retirement, and you will likely drop into a lower income tax bracket. However, other costs could rise. For instance, you will probably spend more on leisure activities and healthcare. And as time goes by, inflation will make everything you buy more expensive
To get a better idea of what your needs will cost, think about:
- Housing— rent or mortgage payments, property tax, homeowners or tenants insurance, utilities, and upkeep
- Transportation— vehicle payments, fuel, parking, insurance, and maintenance
- Food—groceries as well as restaurant meals Healthcare—health insurance premiums and treatment costs
- Travel, entertainment, leisure, and clothing
- Taxes and insurance— senior life insurance, IRA and 401(k) withdrawal taxes, pension taxes