Money Needed to Retire: When Will You Have Enough?
Do you have a date in mind when you'd like to retire? To work toward your retirement goal, you should also have an idea of the amount of money needed to retire and how many years it will take you to get there.
Decide How Much You Need
First, estimate the income you'll need in retirement. For example, if 25 percent of your salary goes to taxes and retirement savings, you'll need 75 percent of your salary to maintain your lifestyle. If you plan to travel more or move to an area with a higher cost of living, you'll need income that's equivalent to a larger percentage of your salary. On the other hand, if a large part of your income is going to your children's college tuition or other expenses you won't have to worry about in retirement, you might be able to get by with a lower percentage. Remember to factor in health care expenses. Include your premium and the average amount you expect to spend on care annually. Use our Retirement Savings Calculator to get started.
Set a Savings Goal
Once you know the income you'll need, you can set a goal for your retirement savings. Although there is no one right answer, there are some guidelines you can use. One is that it's generally safe to withdraw 4 percent to 4.5 percent of your savings a year, according to Forbes. So, if you can save $1 million, you could draw 4.5 percent annually to have $45,000 a year for about 22 years. Add in $15,000 a year in Social Security, and you would have $60,000 a year. Other guidelines suggest saving eight to 10 times your salary by retirement in order to replace 75 percent of your salary, CNBC reports. According to those guidelines, if your salary is $80,000, then you should save $640,000 to $800,000.
Estimate Your Social Security Benefits
To make sure your predictions are in the right ballpark, check the benefits you can expect using the Social Security retirement estimator. The value of your benefit goes up if you delay retirement by a few years past the standard retirement age, according to the Social Security Administration. So, it's a good idea to look at estimates for retiring at a few different ages to learn how your benefits could change. If the estimator gives you a result that's different from what you expected, adjust your savings goal.
See How Much You Have Now
Add up your savings, including cash, 401(k)s, other retirement accounts and investments. Now you can compare that to your savings goal to calculate how much more you need to save by retirement. If you don't have retirement accounts in place or are not setting aside enough for the future, remember the power of compound interest. Your money will grow more quickly in investments where your interest earns interest and is compounded (calculated on previously accumulated interest) monthly.
Set a Realistic Timeline
Enter your current savings amount, age and income into a retirement calculator. Try entering a few different lengths of retirement to see what percentage of your income you'll have to save annually before you have the money needed to retire. You can then forecast your retirement age.
As you can see, there's a range of recommendations for how much money you need to retire. That's because different financial planning models make different assumptions about how many years you'll spend in retirement, how well your investments will perform and how much you'll receive in Social Security.
Since there are many variables that go into planning for retirement, no single calculation can give you a definitive answer. It will help to talk to a financial planner to confirm that your preferred retirement age makes sense for you.