The short and sweet of it is: determine your desired annual income and multiply it by a factor of 25 – that number is how much you will need to have saved. Below we will discuss opportunities to grow your retirement income number and ways that we can reduce the amount you need to save and still meet your desired retirement income goals.
Don’t worry, you’re not alone if you know – or think, that you may falling behind when it comes to saving enough for retirement. The latest Report on the Economics Well-Being of US Households released by the Federal Reserve found that 64% of working adults knew that they were behind in saving enough for their retirement. Many of those surveyed had significant concerns that at their current rate of saving they would have to dramatically lower their standard of living in their retirement years. These fears are warranted and should be addressed – sooner rather than later. The question that we all want to know the answer to is, How much do I really need to retire? Here’s how to calculate YOUR retirement savings number.
- have 1x your salary saved for retirement by age 30
- have 2x your salary saved by age 35
- have 3x your salary saved by age 40
- and so on….
One common rule-of-thumb is that you will need 70%-80% of your pre-retirement income in your retirement years. So, if during your working years you made an average annual salary of $85,000, you may only need $59,500-$68,000 a year in retirement. This of course is contingent on your ability to have lower expenses in your retirement than during the pre-retirement phases of your life. If you will still have a mortgage payment, student loan payments, children living at home, new car purchases, or a lot of traveling planned, your math could be significantly different. Depending on how much you plan to spend per year in retirement, you could end up having to replace a 100% (or more) of your pre-retirement income. So, the question remains: How much do I need to save to hit my retirement income goals?
4% Rule: portfolio balance x .04 = annual retirement withdrawal
The most common rule-of-thumb is the 4% rule. The 4% rule states that if you limit your retirement income withdrawals to 4% of your total investments, you should never run out of money. A quick way to utilize the 4% rule to calculate how much you need to save to comfortably retire is to multiply your desired annual income by 25. If you think you want to live on $100,000 per year in retirement, than you will need to save $2.5M ($100,000 x 25 = $2.5M). If you are planning to travel and that number is closer to $150k per year, than you will need to save $3.75M. A lot has changed since the inception of the 4% rule, and it has received some criticism over the years, and may not yield a precise and realistic number for everyone. Despite its limitations the rule is still a very helpful tool to present a visual ballpark number of how much you need to save.
One of the best retirement income strategies is to establish additional, tax-advantaged, income sources to draw on in your retirement years. The downside to the 4% rule is that it only takes into consideration your investment returns. If you can secure additional streams of income, you can effectively reduce the amount you will need to save. Think rental properties or for-profit hobbies and crafts that can bring in household income. Lastly, you need to determine how much of your retirement income will be taxable.
“The questions isn’t at what age I want to retire, it’s at what income.” – – George Foreman
Do you have income strategies in a post-tax account? Although there are advantages to tax-deferred retirement accounts, implementing post-tax strategies can significantly reduce how much you will need to save to thrive in your retirement years. Depending on your retirement income tax bracket, you could save 10%-37% in income taxes alone. Remember: every dollar paid in costs and taxes is a dollar less that you have to spend in retirement. A significant part of your retirement income strategies should be a budget plan to be completely debt free in your retirement years.
The bottom line is that everyone’s retirement income needs will be slightly different and unique. Think through your anticipated expenses and potential income streams and utilize the above information to establish a strategy to comfortably enjoy your retirement. If you would like expert advice and a personal financial roadmap, please reach out and let’s set up a complimentary review.
