Retirement can look like some mystery island that lies somewhere below the horizon. You know that whatever happens, you’ll get there one day but there’s no way to know what it will look like or how rich life will be on it. We’re so busy living day by day we don’t have time to think about life in our late sixties, seventies, and eighties. Who knows what will happen before then?
While we can’t know what will happen a decade or two or three down the road, we can see the route we’re on now and start to plan according to that path. We can see how much we’re saving, calculate how much that savings rate will give us when we’re ready to retire—and determine whether it’s enough.
How Much Will You Need to Save Before You Can Retire?
That determination will be personal. It depends on your chosen lifestyle. If you live in a place with a low cost of living and plan to spend your retirement on your porch, you won’t need to save very much at all. But if you’re planning to move to Florida or want to spend your retirement taking in Broadway shows, traveling around the world, or sailing your yacht, your savings plan will need to be more aggressive.
Calculate Your Retirement Income
One place to begin then is with an estimate of the yearly income you’ll need to live the retirement you want. Bear in mind that by the time you retire, your mortgage is likely to be paid off. You’ll have no more student debt. Your children will have already had their weddings and bought their own places. Your biggest expenditures will be behind you. You can focus on your own regular outgoings.
Calculate how much you spend each month on necessities: on food, insurance, utilities, and so on. Add your current entertainment expenses and decide how often you’re likely to travel. Are you hoping to take two Caribbean cruises each year or will you make an annual RV ride upstate?
You won’t be able to come up with an exact number. But you can produce an estimate of the income you’ll need each year to live the retirement you want. You can also multiply your last salary by about 80 percent.
To calculate how much you’ll need to save in total in order to receive that income, you can apply the 4% Rule. This rule allows you to divide the annual retirement income you want by 4%.
So let’s say that you’ve looked at your current expenditure, deducted the mortgage payments and the savings for special occasions, added vacations, entertainment and travel, and found that you need $60,000 a year to enjoy your retirement.
Social Security will provide some of that income. The Social Security Administration provides a calculator that lets you estimate the amount of Social Security you’re likely to receive. Someone aged 60 and earning $60,000 a year, for example, can expect to receive $1,608 a month if they retire at age 65. That’s $19,296 a year, meaning that the retiree will only need to receive $40,704 a year from their retirement funds.
40,704/0.04 is 1,017,600.
That’s the amount you need to have saved in your retirement account in order live a retirement that costs $60,000 a year.
If that amount looks a long way off, bear in mind that most people are behind in their retirement savings. Then start formulating a plan to catch up.
- The Four Stages of Retirement
- When Can You Retire?
- How Much Will You Need to Save Before You Can Retire?
- How to Create a Retirement Savings Habit
- The Benefits and Costs of a Pension
- Retiring with a 401(k)
- The Benefits of a 401(k) Plan
- The Costs of a 401(k) Plan
- Vesting a 401(k) Plan
- 4 Types of 401(k)
- Rolling Over Your 401k
- Leave Your Old 401(k) with Your Old Employer
- How to Rollover Your 401(k)
- Individual Retirement Accounts—IRAs
- How an IRA Works
- Working Your IRA With Your 401(k)
- 3 Types of IRAs
- SEP IRA Limits
- The Benefits of an Annuity
- Deferred Annuities
- Immediate Payment Annuities
- Fixed Index Annuities and Variable Rate Annuities
- Qualified and Non-Qualified Annuities
- Changing Your Annuity—The Section 1035 Exchange
- The Limits of a 1035 Exchange
- How to Plan for Your Retirement
- How to Start Planning Your Retirement