How Much Money Do You Really Need To Retire? Cost Breakdown

How Much Money Do You Really Need To Retire? Cost Breakdown

Retirement is a time that most of us look forward to, but it can also be a scary one when we try to figure out just how much money we’ll actually need to live comfortably once we do.

There are plenty of options out there for retirements plans, like IRAs and 401(k)s, but knowing what’s required as an end goal or magic number is hard to determine.

You’ve probably found yourself asking how much do I need to save for retirement?

There’s no magic figure that’s going to suit everyone so we have to look at factors like lifestyle choices, cost of living, other assets, working age, inflation, and current employment and earnings to get a better understanding.

It’s impossible to be absolutely positive what figure needed for retirement which is why we need to go above and beyond to make sure we’re taken care of in our golden years.

With an understanding of potential costs after retirement, how other external factors can impact our savings, and what we can do to ensure we have the biggest nest egg possible, we’ll have an adequate goal to aim for, no matter our age.

How Much Do I Need to Save For Retirement?

Coins In Jar

Having a goal in mind of how much money you need for retirement is something that everyone should be able to calculate.

Without relying on employer pensions or Social Security, whatever you have saved personally will be everything you have when you retire, so you want to make sure it’s going to be enough.

As a rough guide, you can figure out how much you need to save for retirement by thinking about your current age, what age you plan on retiring, and money or assets you already have saved.

By looking at these three figures you’ll be able to come up with a personal plan to hit the goal that’s needed and start to make the necessary adjustments to make sure you can achieve it.

Obviously, everyone will have unique financial circumstances that have to be taken into consideration as well.

Some might have other assets or a large amount of savings, and others will have a higher cost of living than regular people.

Therefore, calculating how much you actually need for retirement can be trickier than you think.

What Factors Should be Considered for Retirement?

To get the most accurate figure for how much money you’ll need to retire, you need to consider a number of factors.

When you’re trying to calculate this final amount and set yourself a goal to reach it, you’ll want to write down the answers to all of these questions and work them into your calculations.

Where Will I Retire?

Senior Man In NYC

You might not have given it any thought, but the location you decide to permanently retire to can have a huge impact on how much money is needed.

For example, somewhere like New York or Los Angeles will have a higher cost of living than rural cities, so you have to start thinking about where you want to end up.

What Will My Cost of Living Be?

As a general rule, our expenses start to decline as we get older so you won’t typically need as much as you spend now when you’re 60 years old and nearing retirement.

According to a study published by the National Institute of Health, household spendings when we’re 65 will reduce by 19 percent at age 75, 34 percent by age 85, and then 52 percent when we turn 95.

Depending on how long you live, you can expect general costs to get lower each year.

What’s My Current Age and Employment Status?

Your age when you start thinking about a retirement savings plan will have a huge impact because the earlier to start saving the more potential there is to earn.

Your current employment status and salary should also be considered, as well as potential earnings for your future based on pay increases and job promotions.

Will I Have Other Assets and Income?

Savvy investors will have other assets that they can rely on for wealth when they retire, and if this is you then you won’t need to totally depend on a retirement savings plan.

You could have income from investments, real estate, or other financial earnings that will act as a supplemental income when you retire.

How Much Tax Am I Liable For?

Regardless of the retirement savings vehicle you choose, like an IRA or 401(k), you will be liable for paying tax on it at some point.

People who choose a tax-deferred retirement savings plan will have to calculate the tax payable when they finally withdraw their money, so this amount has to be factored in.

What Age Do I Plan on Retiring?

The age that most retirement plans are available to withdraw from without penalties is 59.5 years old, and to receive Social Security and Medicare, the minimum age is 62 years old.

However, there’s no stipulation in place that states you have to retire then.

Many people choose to work until much later in life provided they’re still able to do so and this means you’ll save more in a retirement plan and also need fewer savings to depend on.

How Will Inflation Affect the Money Needed for Retirement?

Money Inflation

In addition to any personal factors you have to take into consideration, the rate of inflation is a huge external factor that will impact how much you need for retirement.

Inflation is a term used in economics to describe the general increase in costs of goods and services over time, and it’s especially important to think about when looking at your retirement savings.

Inflation is something that can’t be avoided and it means that whatever you have saved now will likely not be worth the same amount when you retire.

$30,000 by today’s standards might sound like a lot of money to live for a year on, but in 30 years when you retire, how much will that actually be worth?

To calculate how inflation might impact your savings, a standard rate of around 2 percent per year can be applied.

Whatever things cost today, like the price of gas or an average three bedroom home, you can add a figure of 2 percent each year to get a better idea of what it might be worth down the line.

The longer you have until retirement, the more you can expect these everyday goods and services to cost when you’re ready to get your money

To counteract losing a lot of money when you factor in inflation, you should keep in mind that most employers will give pay raises that fall in line with these figures.

It’s also advisable to choose investment options with your 401(k) or other savings plan that offer returns equal to or greater than the rate of inflation.

When you’re calculating how much of a nest egg you need to cover basic living expenses, this absolutely has to be factored in to give an idea of what things might end up costing when you finally hit retirement age.

What Is the Average Retirement Age?

Illustration Of Growing Average Retirement Age

One major impact on how much money you’ll need for retirement is how old you plan on being when you’re finally ready to leave work completely.

Some people have a clear number in mind for this goal, but it’s completely acceptable to be unsure.

There are many factors that can change our working capacity as we age, and although we might have plans to work into our 70s and beyond, it might not always be under our control.

The current retirement age in the United States differs depending on location.

Research has found that people living in a state with higher costs means they have to work longer to afford it, and states with high unemployment rates usually have earlier retirement ages as older people struggle to find gainful employment in their older years.

Recent figures show that the average retirement rate across the country was 59.88 years old.

Most people retired between the ages of 57 and 66, with the average age among all of them being 62 years old.

Considering that the age where most retirement savings plans can be accessed without penalties is 59.5, these figures seem pretty standard in line with that.

Experts recommend that people work as long as possible so that they don’t prematurely spend their saved money.

With no way of knowing exactly how many years after retirement we’ll live, it can be a daunting thought to run out of money when you’re in your older years and need it.

The longer you work, the more money you’ll be able to accrue and the more your investments will earn, so it’s definitely worthwhile to stay employed if it’s reasonable for your circumstances.

How Much Money Should I Have For Retirement At Certain Ages?

Dollar Savings In Jar

Most people start saving for their retirement when they enter the workforce, usually through a 401k or other employer-sponsored plan.

It was once thought that the magic number we should be aiming for in retirement was $1 million, but these days that doesn’t seem to get as far.

So, how can you tell how much you should have saved at certain ages in life?

According to the experts, this a rough guide to how much money you’ll want saved for retirement, moving up in increments until you hit retirement age.

  • Age 30: One year current salary
  • Age 40: Three years current salary
  • Age 50: Six years current salary
  • Age 60: Eight years current salary
  • Age 70: 10 years current salary

You can also consider that you’ll use around 4 percent of your savings each year of retirement, so make sure there’s enough to last.

These are general figures of course, but it gives you an idea of what goals you should be hitting at certain ages, and whether or not you need to make drastic changes in order to meet them.

Some people might take a risk to retire early and use whatever they have saved to invest in other ways.

There’s nothing preventing you from using your savings plan for whatever financial choices you want to make, but it’s a huge risk that could leave you with no money and is generally not recommended.

The best approach is to put away as much money as possible and let it grow over the years so you’re more than prepared for retirement.

How Should I Be Saving For Retirement?

Savings For Retirement

The most important thing to consider when thinking about how much money you’ll need for retirement is how exactly you’re going to get it.

These days, there are more options available to workers than employer pensions or Social Security payments, and you need to make sure you choose the one that’s going to be the most beneficial.

Workplace retirement account

These include 401(k) and other employer-sponsored plans that deduct money from your pay and put it into a separate account to be invested and saved for retirement.

Most employers offer a matching bonus with these where they will give a certain percentage of contributions as free money to match whatever you put into the account.

IRA

Used as a supplement when you’ve maxed out your 401(k) or if your employer doesn’t offer an employment plan, an IRA is another option for saving money for retirement that comes with penalties if you try to use your money early.

Individual retirement accounts

These can be set up by banks, financial advisors, or plan providers, and include things like a SEP IRA or Solo 401(k), and they’re better suited to small business owners and self-employed individuals.

Pension

Some employers still offer pensions where they put aside money for their employees and then pay them an ongoing partial salary once they retire and until death.

They are less common these days but a valuable tool that’s based on your income and years of service.

If you’re employed, your employer will usually be the one to discuss the plan options for you and to customize how the plan will work and what your investment schedule is.

For self-employed workers, the responsibility is on you to seek out financial assistance or come up with your own retirement savings plan to use.

Tips for Maximizing Your Nest Egg for Retirement

Retirement Eggs Nest

To ensure you have the most money possible for retirement, there are some things you can put into practice now that will pay off later.

Consider applying these tips to your retirement plan and see what a difference it can make when the day comes to finally retire.

Start now

Stop putting off your retirement plan and thinking you’ll be able to sort it out another day. The sooner you start, the more you’ll have to live off, and the earlier you can retire if you have enough.

Meet employer contribution limits

If your employer offers a matching contribution make sure you’re meeting it so you can get access to this money.

These bonuses are essentially free money that you can save for later and it’s the bare minimum you should be aiming for.

Don’t touch your savings

As tempting as it can be to have that money sitting there, the balance of your retirement savings should be left alone.

If you withdraw early you’ll be faced with the standard income tax as well as additional penalties and it’s just not worth it.

Open an IRA

If you already have a workplace retirement plan in place, it can be helpful to open up a separate IRA.

Having access to both of these and knowing the right amounts to put into each can diversify your investments and give you special tax breaks that might not be possible otherwise.

Catch up contributions

Some plans allow you to go above the standard limits for contributions once you’re over the age of 50 so that you can catch up. If this is something that could help, you should definitely consider it.

Related Questions

Happy Senior Man Relaxing

Without a background in finance, it can be overwhelming to understand retirement funds and just how much is needed.

These are some common questions people have about how much is needed for their retirement that might help make things a little clearer.

Should I Pay Tax Now or Wait For Retirement?

Depending on whether you’ll be in a higher tax bracket now or when you retire, you’ll have to decide the best approach for paying tax.

A 401(k) is tax-deferred whereas a Roth IRA is funded with taxed money, and either could be the right approach for you depending on your income.

What Should I Invest My Savings In?

The investment choices you go with will be determined by your age usually.

Younger people will be able to take advantage of high risk, long term investment choices whereas those closer to retirement age should stick to safer options.

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