Updated: 4 days ago
Retirement planning is a topic that often brings uncertainty, especially for those who don't follow the traditional nine-to-five career path. Have you ever asked yourself, "How much do I really need for retirement?" If so, you're in good company! This blog post will dive into some retirement planning basics.
Define Your Retirement Goals
Defining your retirement goals is crucial before determining how much retirement savings you need.
Consider the following:
What type of lifestyle are you looking to lead in retirement? Similar to what it is now? More lavish? More basic?
Do you want to work part-time in retirement to have something to do? Or will you be depending entirely on your savings?
Keep in mind the above as we move through some of the retirement rules of thumb.
There are a bunch of retirement calculators out there that can help you gauge how much to save, but they can be kinda confusing. I'll start by touching on two rules of thumb to rev the engines, then introduce the calculators in case you want to dive deeper.
Rules of thumb are useful to help get you thinking about retirement savings, but remember... they're no substitute for a personalized plan!
Saving a percentage of your income
The Schwab Center for Financial Research gives an outline of how much of your income to save based on the age you start:
This rule of thumb works by estimating the annual retirement income you expect to provide from your savings and multiplying that number by 25.
Let's say you plan to live off of $75,000/year in retirement. If you get $12,000/year from Social Security benefits (more on this later), you need to cover $63,000/year from your savings.
$63,000 x 25 = 1,575,000
The 1.5 million would be your savings goal.
If you want to dive into the calculators, below are a few options. I want to caution you that the numbers they produce vary greatly. But feel free to play around and see if you can glean anything helpful.
How Long Will My Money Last?
The 4% Rule
Picture this: You stroll into your golden years, having stashed away a cool million. How do you spend that mil? Well, it's as straightforward as sipping champagne on a sunny beach. You start by plucking a mere 4% from your savings for the first year. For instance, 4% of your million would leave you with a grand expenditure of $40,000 in year one of retirement. Then, like a fine wine maturing with time, you add a dash of inflation adjustment each year after that.
Financial advisor William Bengen created this rule based on his 1994 research. He found that if you invested at least 50% of your money in stocks and the rest in bonds, you'd have a strong likelihood of being able to withdraw an inflation-adjusted 4% of your nest egg every year for 30 years (and possibly longer, depending on your investment return over that time). Although Bengen first cited the rule nearly 20 years ago, his theory still holds true today.
Nerdwallet did have this to say about the rule. "... the volatile stock and bond markets in the post-pandemic world could make this strategy less effective, according to Morningstar's 2022 State of Retirement Income report. Financial planners will likely be keeping an eye on this strategy in the coming years to monitor its effectiveness."
Back into your number
Sometimes, it's fun to reverse-engineer how much you should save. Using this Nerdwallet calculator lets you see how long your savings will last.
Social Security Benefits
Not everyone gets Social Security benefits; it all depends on how many credits you've earned during your work history. However, knowing this number could help hone in on your savings strategy.
If you want a very rough estimate, the SSA has a quick calculator you can use: https://www.ssa.gov/OACT/quickcalc/
If you want to know exactly how much you're looking at you can establish a SSA account and they will show you: https://www.ssa.gov/myaccount
I would be remiss if I didn't quickly mention taxes. It's essential to keep in mind that depending on the type of account the money is withdrawn from, you may owe income or capital gains tax.
You won't owe anything if you invested the money after taxes, such as a Roth IRA. You'll owe taxes on the withdrawal if you invested pre-taxes, such as a Traditional IRA.
The Bottom Line
To reiterate: Retirement savings is extremely personal. However, we must start somewhere and work our way into the perfect fit.
I hope you've found some helpful tips, and don't forget to read the disclaimer!
Disclaimer: I am not a licensed Financial Planner, and this information is to give you an idea of how to start thinking about retirement savings. For an individualized plan, please get in touch with a retirement planning professional.
Here's to you,
Money Coach (AFC® Candidate)