Author: Natalie Bright
Are you ready to launch your savings portfolio but you are not sure how much you need to save to afford the lifestyle you want?
In this article, we will educate you on the factors you need to consider when determining the right retirement savings target.
Post-Retirement Planning: How Much Do I (Really) Need to Retire?
How Much Do I Need to Retire?
Most financial experts would advise you to save 12x your pre-retirement salary and live on at least 80% of your pre-retirement yearly income.
This means that if you earn $100,000 yearly, you should aim for $80,000 in revenue to afford a comfortable post-retirement lifestyle.
However, you can adjust this depending on several important factors. These factors include pensions, part-time employment, Social Security, additional income sources, and your desired lifestyle and health conditions.
Utilize the 4% Rule
One general rule of thumb for determining the amount of income you need to generate from your savings is to divide your desired annual retirement income by 4%. It is called the 4% rule.
For instance, if you have $2 million saved, you would withdraw $80,000 during the first year of retirement either as a series of investments or as a lump sum.
In the following years of retirement, you would change this amount to keep up with increasing living costs.
The 4% strategy assumes a 5% yield on investments after inflation and tax, no alternative retirement income, like Social Security, and a lifestyle much similar to the one you would be living at the time of your retirement.
If you follow this rule, you would never worry about running out of money for 30 years of retirement. But remember, retired people who live longer will need their portfolios to last longer, also, medical costs and both – foreseen and unforeseen – expenses can rise over time as you age.
Focus On Your Income – Not Money
It is essential to know that deciding on your retirement amount isn’t about a fixed savings amount. For instance, an average American retirement goal is to reach a $1 million nest egg. While $1 million is a great target for most people, it may be impractical in some cases.
The main factor to consider as you determine how much is needed for your retirement is if you have enough money to fund the quality of life you desire after retirement.
$1 million may allow me to make enough income forever. But that doesn’t necessarily mean it would work for you. The focus should lie on whether your money can create the income necessary for you to enjoy the life you desire.
How Much Income Do I Need
The reason why it’s okay not to manage below the entirety of your pre-retirement income is this: after you retire, you can cut back on particular expenses. For instance:
- Transportation and work-related costs.
- You might not have life insurance as you may no longer have dependents.
- You no longer save for retirement.
Retiring on 80% of your yearly income may not be feasible for everyone. So you may want to modify your goal to meet the retirement lifestyle you seek and your expenses.
If you aim to travel very often, you should plan for 90% to 100% of your retirement income. On the contrary, if you intend to pay off your mortgage before you retire, or scale down your living conditions, you can live comfortably below 80%.
As stated earlier, several important factors make up this decision. There is no perfect methodology for determining the right retirement savings goal.
So it is a good idea to seek counsel from a financial advisor who can help you create a retirement savings scheme that works well with your situation.