All working people have the same goal of retiring, but the timing varies greatly from person to person. The amount of money saved in a retirement fund is typically the main determinant of when a person decides to retire. Without sufficient savings, retire too early, and you might have to go back to work or lower your standard of living. So, how much is sufficient in terms of retirement savings? Even though the answer may not be clear-cut, running the numbers can give you a general idea. Here are some recommendations to help you with your retirement planning.
Conflicting Conventions
There are two general guidelines that people can use to set a rough budget for their retirement.According to Income
You should save enough money, according to one of these rules, to be able to live off of between 75% and 85% of your pre-retirement income. If you and your spouse make $100,000 together, for instance, you should make plans to save enough money so that you each receive between $75,000 and $85,000 per year in retirement.According to Costs
According to the second generalization, your retirement planning should be driven by your expenses rather than by your income. This method calls for you to calculate how much money you'll need to live on each year in retirement and multiply that amount by 25 rather than setting a number based on your current salary. You will need to save up that much money. You'll need a portfolio worth $1 million when you retire, for instance, if you and your spouse decide to add an extra $40,000 from your savings each year to your Social Security income. You will require $2 million to withdraw $80,000 annually for you and your spouse.Questions to Ask to Help You Estimate Your Expenses
Unlike the first rule of thumb, which can be applied fairly simply by taking your current salary and figuring out the percentage, the second rule of thumb will require more effort on your part. It would be best if you made an accurate projection of how much money you'll require annually for living expenses when you retire in order for the retirement goal to be useful. Look at your current budget to get started. Even though your retirement expenses might not match your current expenses, it will give you a good place to start when making estimates. Divide your budget into categories and consider how your retirement lifestyle might affect each category to make it more accurate.You can figure out your current budget by asking yourself the following questions.
After you retire, will your children still need your financial support?
Please take into account the price of sending your kids to college and possibly funding their graduate studies. Think about whether they might ask you for a loan to buy a car, a house, or an engagement ring. Will you cover the cost of their wedding? Your retirement expenses may increase as a result. Remember to amortize one-time costs. Consider paying $20,000 for your child's wedding as an example. Assume that your annual retirement expenses will be, on average, $2,000 more than your monthly expenses.Are both your partner and you in good health?
Have serious medical conditions that could be costly in the family history? Medicare covers some costs, but many older people must pay some costs out of pocket. Additionally, there are "indirect" medical costs, such as remodeling your home to make it accessible for wheelchairs, which can be very expensive. According to research by Fidelity, the typical 65-year-old couple retiring in 2019 will spend $285,000 on health care expenses over the course of their retirement, and that's assuming Medicare covers the couple.Do You Owe Money?
Your budgeting will be impacted by credit card debt, auto loans, and student loans. To determine your timeline for debt repayment and how it will impact your annual retirement budget, first determine your debt balances and the corresponding interest rates.Do You Plan to Get a Mortgage?
Remember to factor in your mortgage when calculating your debt. Budgeting for your retirement heavily relies on knowing how long you'll be making mortgage payments.How Much Does Your Home Cost?
You will continue to incur expenses related to homeownership even after your mortgage has been paid off. Consider your property tax rate and figure out those yearly expenses. Another ongoing expense you'll have to plan for is homeowner's insurance.Can You Take Care of Your Parents?
Have either you or your spouse got aging parents? You should be ready to meet their needs if they require physical or financial assistance in their later years.Will You Look After Any Other Members of My Family?
You should set aside money if you think you'll need to assist cousins, siblings, or other family members.Make a Retirement Income Calculation
If you are aware of the source of your retirement income, you can more precisely estimate the amount of money you will need to save to maintain your standard of living in retirement. When creating your retirement budget, keep in mind that your retirement income will be deducted from your expenses. Social Security payments, pensions, and any income from royalties, annuities, or rental properties are all included in this income. A pension or retirement savings plan provided money to less than one-third of Americans 65 years of age or older in 2019. Enquire with your employer about the specifics of your pension benefits if your job has one. The best place to start your inquiry is with the human resources division. Americans 60 and older receive a form from Social Security once a year that details the number of retirement benefits they are eligible for based on their current contributions. You can find your anticipated payment on that form. Alternatively, you can use the official Social Security website estimator if you can't find the form.Final Verdict
Although using a general rule of thumb can help you set a realistic goal to work toward as you approach retirement, nothing can replace hiring a financial planner who can carefully examine your situation and plan accordingly. These approximate goals can be calculated using either your current income or your anticipated expenses. It's crucial that you begin saving and planning well in advance of the day you intend to quit your job for good.Questions and Answers (FAQs)
What is the typical retirement age?
In the US, men typically retire at age 65, while women do so at age 63. The average age at which you can start receiving Medicare benefits is 65, and the age at which you can start receiving your full Social Security benefits is 66. As a result, your financial situation should determine the timing of your actual retirement.What is the majority of retirees' primary source of income?
Social Security benefits provide income to almost nine out of ten people over the age of 65. Retirement accounts like a 401(k), 403(b), or IRA are additional sources of retirement income. You might be able to use the equity in your home as a source of income in addition to the separate investments or annuities that many retirees have.