Deciding How Much You Need To Retire
We all want to be ready financially when we retire. We want to enjoy our lives in those years after we stop working fulltime. No one wants to spend their later years worried about how to make ends meet.
If you want to retire ready financially then you must begin to prepare now. You need to have a plan and stick to it in the years leading up to retirement. But many people do not have a plan and actually don’t know how much money they need to retire.
If you need help deciding how much money you will need to retire, take a look at this simple explanation and then go to work making your plan!
Take a look at your budget
This step is possibly the most tedious, but if you get through this step, the others will be a breeze!
If you already have a budget, this part will be much easier, since you’ll be basing your future spending on your current spending. But if you don’t yet have a budget, take your current expenses from the last month and record them, either on paper or an Excel spreadsheet…
…For variable expenses, such as an electricity bill, use the average of a year’s bills, divided up into 12 months. And for expenses that don’t happen every month, such as an auto insurance premium, divide up the amount to determine approximately how much you’d be spending every month.
The great thing is, some expenses, such as a mortgage or other debts such as student loans, should disappear by the time retirement hits…
…Figure out how much you’ll spend in retirement
In another column on the spreadsheet, write down what you think your budget will be in retirement, minus paid off debts. But — be realistic — there may be fun items you’d like to create a budget for, such as travel, golf, eating out, or ballroom dance lessons. Once you’ve added these expenses and your monthly bills, you’ll have an estimate you can use to plan out what you’ll need in retirement.
But, that’s not all — you’ll also need to use something called projected spending to calculate your estimated spending in retirement.
How projected spending works
Projected spending multiplies your current income by a certain percentage to determine how much you’d need in retirement. Though this method is not completely accurate, it does give you a good estimate to begin with when you start thinking about your retirement. Most often, the 80% rule is used, which says you should have a goal of replacing 80% of your pre-retirement income — or your average income you expect to earn 10 years before retirement…
…If you’d rather be on the more conservative side when it comes to spending, use the 90% rule — or, if you think you’ll definitely spend much less in retirement, calculate 70% of your pre-retirement income. Adding in social security can move the percentage down more. But keep in mind — this number is just an estimate to get you started.
The 4% rule
Once you’re in retirement and you’ve got a bunch of money stashed away, you’ll want to keep something in mind: The 4% rule. The 4% rule maintains that you can safely withdraw 4% of your retirement savings each year without running out of money.
Here’s a sample calculation to put this idea into perspective. Say you have retirement savings of $1 million, and your projected spending has been calculated to be around $3,000 a month. Using the 4% rule, you could safely withdraw $40,000 per year from your retirement account, giving you about $3,333 per month to live on. Since you may also receive other supplemental retirement income such as Social Security or pension payments, you’d be well above the $3,000 per month needed to fund your retirement. – Clark.com
If You Are Starting At Zero
If you have not taken action on your retirement plan before and you have nothing saved. Here is a discussion that will be helpful to you.
What if you have nothing saved at all?
Even with nothing saved, most American retirees will receive something from Social Security, and the average benefit is enough for a very basic lifestyle in a reasonable cost of living part of the country. The average benefit to a retired worker as of May 2016 was $1,347.59 per month. In addition, the average benefit to a retiree’s spouse was $698.59 per month.
Those average benefits translate to $16,171.08 per year for an individual or $24,554.16 for a married couple retiring on one spouse’s earnings record. The Federal Poverty Level guidelines for 2016 put poverty level income at $11,880 per year for an individual or $16,020 per year for a couple. So if you’re able to keep your costs near that poverty level of spending, it may very well be possible to retire with nothing more than the typical Social Security benefit.
In addition, Social Security benefits increase in line with the overall inflation rate. As long as the income needed to stay ahead of the poverty level doesn’t grow faster than inflation, it’s feasible for a Social Security dependent retiree’s income to stay ahead of the poverty level for the rest of his or her life.
While that news may make it tempting to think that Social Security can provide you with sufficient income to cover your costs, reality is not quite that appealing. There are a few huge watchouts in relying on Social Security for your sole source of income.
For one, Social Security’s Trust Funds are expected to run out of money within the next 18 years. If nothing changes, that will cut benefits by about 21% immediately and by as much as 26% over time. While planned Social Security benefits might keep the typical retiree reasonably above the poverty level, the risk of those reduced benefits will make it much tighter.
For another, retirees typically face higher healthcare costs than their younger counterparts, and healthcare costs frequently rise faster than the overall inflation rate. As a result a Social Security-only income that may have covered your costs early in your retirement may not truly cover your full costs, including healthcare, later in your retirement.
For yet another, relying on Social Security alone leaves you with no buffer from your savings or investments to handle the unexpected curveballs life sends your way. Those curveballs don’t stop just because you’ve stopped drawing a paycheck, and having money available to handle them is a critical part of assuring small problems don’t spiral into bigger ones.
Have you got a retirement plan?