How much will you need for retirement? That number will vary depending upon things like your expenses and life expectancy.
Knowing what you need can help you save enough for retirement, but figuring out what that number is can seem intimidating. Using one of these popular tricks can help you simplify the process and get on the right track.
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1. The "Multiply by 25" rule
With the "multiply by 25" rule, you take the amount of money you think you'll need in retirement each year and multiply it by 25. So if you estimate you need $40,000 each year for your expenses, you should have $40,000 x 25, which would equal a $1 million balance.
Calculating this is very easy and can give you a general idea of your needs very quickly. When you incorporate historical returns and combine it with the 4% rule below, this method provides for 30 years of withdrawals, which helps if longevity is something you're concerned about.
2. A 4% withdrawal rate and 80% of your pre-retirement salary
Everyone will have different income needs in retirement and you may find that your bills haven't gone down by much once you've stopped working. But reducing your expenses down to 80% of your working income could help you avoid running out of money. For instance, if you make $100,000 a year while working, you should aim for being able to get $80,000 a year from your portfolio in retirement.
Studies have shown that an annual withdrawal rate of 4% can help your money last for about 30 years in retirement. Using this rate with $80,000 a year in retirement income would mean that you need $2 million at the start of your retirement.
Flaws in the plans
One flaw with using these rules of thumb is that they assume that you don't have any other income sources. And if saving for this lofty amount seems impossible, something like Social Security could drastically reduce the amount that you contribute. For example, if you receive $1,500 a month in income from Social Security, you will get an annual payment of $18,000. If your needs are the same at $40,000, then you only need $22,000 from your retirement assets. Your total personal savings amount gets cut almost in half to $550,000 when you include Social Security.
These rules also assume that your money is invested and will outpace inflation and your withdrawals. If the rate of return required for this would make your portfolio too aggressive, it may be unsuitable for you. And if your accounts are invested differently, the amount that you take out or save should be adjusted.
Adhering to the dollar amount or withdrawal rate that you planned for is also crucial and has very little wiggle room. But life isn't always black and white and from year to year your needs may differ. If there is a year when you need more, you should redo your projections and make sure you're still on track.
Tailored approach
In reality, these approaches can be a great way of getting started with retirement planning. But the more you can tailor your saving to your own individual circumstances, the more it will suit your goals.
How much you need for retirement should include things like your retirement income expectations, but should not stop at that. A good plan will take into consideration things like Social Security or a pension. If you are someone who has more of these income sources, you will need to save less money on your own than someone who does not have these additional income streams. You should also take into account things like your life expectancy and the rate of return you could receive on your investments. If you are someone who thinks you will live a long life in retirement, you'll need more saved for these years. And if you're getting regular increases in your account balances before and after retirement because of how you've invested, you may need less money than someone who funds their retirement solely with their contributions.
By using a retirement savings calculator, you can better address things like how many years you will plan for living in retirement. You should also revisit your approach at least once a year until you retire. Changes in your expense calculations or savings estimates may require tweaks to your plan. Once you're retired, you should also plan on reviewing your estimations annually, especially if you withdrew more than you'd intended in a particular year or if the stock market had a particularly bad year. Extreme events like this could drastically change your projections.
Finding out how much you need for retirement and how to get there doesn't have to be complicated. Finding out your number and making a plan that will get you there is the first step you should take. And while this may seem like something you should do as you get closer to retirement, the earlier you start, the more control you have over achieving your goals.
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March 25, 2021 at 07:31PM
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These Popular Tricks Can Predict Your Retirement Needs - The Motley Fool
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