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Life

How Much Money Do I Really Need to Retire?

March 13, 2017

  • Consider your current age and present-day expenses
  • Estimate the age at which you want to retire
  • Think about what your expenses will look like when you are retired, based on your goals
  • And get started!
4 min read

Want to hear something scary? One in three Americans admit to having no retirement savings at all. None. Nada. Zilch. Are you one of those Americans, or have you already started saving? And how much do you really need to retire anyway? That’s the $64,000 question – times ten.

But before you start Googling how much your less-necessary-organs are worth, take a deep breath and keep reading.

Starting to think about retirement

The amount you need to save in order to retire depends on the lifestyle you plan to live in your golden years. Aim to replace 70 to 80% of your pre-retirement income if you plan to retire modestly with reduced spending (i.e., you’ve paid off your student loans and mortgage, no longer have elder care or work-related expenses, etc.).

Planning on living the high life? You’ll want to save more like 90 to 110%. Maybe you want to travel, buy a vacation home, or take up an expensive hobby like sailing or flying. 

You should also consider where you’d live. Are retirement havens like Florida or Arizona on your horizon? Or do you plan to leave it all behind and retire to southern Spain and live the expat life?

The general rule of thumb is to save between 10% and 20% of your annual income from the start of your career until the end.

The cost of living at your chosen retirement destination should also be taken into account. Do you expect it to be higher or lower than where you are currently living? Or are you gonna stay in your current abode and keep it simple?

Things like future healthcare expenses should also be considered. Are you managing a chronic illness or planning extensive plastic surgery? Hey, we don’t judge.

Social Security benefits will provide some monthly income, but it’s probably not enough if you plan on hitting the links or visiting the grandkids regularly. 

How much money will I need to retire?

The general rule of thumb is to save between 10-20% of your annual income from the start of your career until the end, in order to take full advantage of compounding and to keep your contributions in line with pay raises.

If you follow the 4% rule, in which you withdraw only 4% of your savings in the first year of retirement and increase that dollar amount each year thereafter based on inflation, you’ll be able to sustain your savings for up to 30 years. This is all theoretical of course, since no one can predict the future.

What are my options for saving?

While any investment (stocks, bonds, mutual funds, ETFs, etc.) can be components of your retirement plan, the “three amigos” of retirement savings are 401(k) plans, traditional IRAs, and Roth IRAs.

401(k)s

A 401(k) plan is an employer-sponsored retirement savings plan in which contributions are made through automatic payroll deductions using pre or post tax dollars. Many companies offer matching contributions, earning you even more money. 401(k)s can be Traditional or Roth (which has to do with when you pay taxes on the money you contribute).

Traditional 401(k) plans are far more common, though Roth are growing in popularity, particularly among younger generations.

IRAs

Both Traditional and Roth IRAs are individual retirement accounts (thus the acronym, IRA). Anyone who meets the criteria can open one and contribute, but the tax benefits of each differ:

Traditional IRAs use pre-tax dollars and grow tax-deferred just like a traditional 401(k) plan, but Roth IRAs use post-tax dollars, so you can withdraw the money tax-free when the time comes!

Check out: IRA vs. 401(k): Both? Either? Neither? Help!

So how do I get to those magic numbers?

Lots of financial firms provide retirement calculators and savings checkpoint charts to determine if you’re on pace, but no matter which method you use, most experts agree on five basic strategies:

Start Early

It’s a simple concept: The longer you save and invest, the more you’ll earn. Even small contributions add up over time, thanks to the power of compounding. 

Diversify

Variety is the spice of life, and it’s a great way to grow money and limit risk. Having both an IRA and a 401(k) not only allows you to save more money, diversifying your investments can shield you from unexpected tax changes.

Max out

Whenever possible, contribute the maximum amount to both your IRA and your 401(k) . The combination of compounding, employer match contributions, and the various tax benefits of each account will add up over time.

Take advantage

Get all up your benefits’ business. Understand the tax advantages of a 401(k), a traditional IRA and a Roth IRA. Just as the old public service announcement used to say, “The More You Know!” 

Stash it

Saving for a rainy day may not be baller, but stashing unexpected money, like year-end bonuses and tax refunds, is smart. That “found” money wasn’t planned, so you won’t miss it, or the diamond studded iPhone you were going to buy.

Now you’ve got it!

Make your future money

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By Clare Edgerton

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