Regarding retirement planning, the question of how much is enough can be quite daunting.
Ensuring you’ve saved enough for your golden years means looking at your current finances and considering what financial goals need to be met.
However, if you prepare in advance and follow some simple steps, you’ll set yourself up for success in building a desired retirement lifestyle.
In this blog post, we’ll share our best tips and strategies to help you plan responsibly and arrive at retirement with peace of mind knowing that all your bases have been covered.
Retirement Expenses
Many people use the 80% rule as a guideline to estimate how much they need to save for retirement.
This rule states that you will need approximately 80% of your annual pre-retirement income to maintain your current lifestyle during retirement age.
However, this is merely an approximation and does not consider individual needs or preferences. It is best to consult a financial advisor when creating a retirement plan and budget.
Many different formulas are available for estimating retirement expenses, providing only rough estimates at best.
The percentage of income needed to maintain your lifestyle when you retire is based on major expenses decreasing, such as transportation costs and delayed retirement-plan contributions.
Of course, other costs could increase, including vacation travel and medical bills, which are virtually unavoidable in retirement.
Many retirees report that their expenses in the first few years after retirement can sometimes be even greater than they spent while working.
This is likely because they now have more free time to go out and enjoy leisure activities, which often have a hefty price tag.
Furthermore, it isn’t easy to properly budget and manage one’s finances without an income during this adjustment period.
Standard of Living
Of course, it is always difficult to accurately predict future expenses.
However, as you age and get closer to retirement, you will likely better understand how much money you need to maintain your current lifestyle or pursue a different one.
Consequently, those approaching retirement need to take the time now to consider their financial requirements for the years ahead carefully.
If you use that as a foundation, subtract any expenses you anticipate will no longer be necessary when you retire and augment them with new ones.
This should provide at least an approximate idea of what your retirement accounts might look like.
If you expect to have any large expenses shortly (such as increased travel costs or a complete kitchen renovation), be sure to factor those into your budget.
The same applies to reducing expenses, like moving to a more affordable home.
How Much Should I Save for Retirement Each Year?
One useful suggestion, often called a ‘rule of thumb’ is to set aside at least 15% of your desired annual retirement income for yearly savings.
Ideally, this practice should begin in the early years of one’s working life, during the twenties, and continue throughout their entire career.
By consistently saving a portion of one’s earnings over many years, one can accumulate substantial wealth and enjoy financial security later in life.
How Much to Save for Retirement by Age
Fidelity Investment strategy recommends utilizing benchmarks based on a multiple of your annual earnings to determine how much money you should have saved for retirement by the time you reach certain ages.
This multiple is intended to guide you in understanding how much you ought to have amassed over the years as part of long-term financial planning.
The suggested benchmarks indicate what would be considered an adequate level of savings at different stages throughout your life.
At age 30, individuals should strive to save at least once in their annual retirement salary.
By the time they reach 40 years of age, they are recommended to save three times their current annual salary.
As they reach 50, six times their current income should be stored away as they move through middle age.
By 60, this amount should increase to eight times the annual salary, and by 67 – when many retire – it is advised that they have accumulated an amount equal to ten times their yearly earnings.
Retirement Income
Now that you know the amount of money you will need to cover your retirement expenses, the next step is to calculate whether or not your anticipated income from three primary sources will be sufficient.
These sources include Social Security benefits, Defined-benefit pension plans, and Retirement savings that you have accumulated over time.
To properly assess if your income will suffice for your desired lifestyle during retirement, adding the expected amounts from each source is necessary.
Social Security Retirement
Suppose you’ve faithfully contributed to the Social Security system through your work for a minimum of 10 years and have earned 40 credits.
In that case, you are eligible to receive an estimate of the Social Security retirement benefits you can expect.
The best way to get this projection is by using the Social Security Retirement Estimator, which provides users with a detailed calculation of their estimated benefits when entering their personal information.
As you approach the end of your working life and get closer to retirement, your estimates regarding the amount you need to retire comfortably will likely be more precise.
It is important to remember that the earlier you decide to take your benefits, the smaller the amount of money you will receive each month.
You have a choice regarding receiving your benefits; they can be taken as soon as you turn 62 or postponed until age 70.
After reaching age 70, there is no longer a financial gain associated with waiting any longer than this because you will receive the maximum benefit regardless of what age you are at that point.
Use These Retirement Planning Tips And Strategies
Retirement planning can seem daunting to many, but it doesn’t have to be.
With the right information, you can find tips and strategies to help you stay on track for your retirement plan.
Being realistic about your retirement goals and understanding the different ways to save and manage finances is a great way to ensure you’re setting yourself up for success in retirement planning.
Deciding how much to save each year is a subjective decision and should be considered with what financial goals are most important for you.
After all, the earlier in life you start investing in your future security, the more successful financial freedom you can enjoy in the long run.
For more helpful tips on starting with retirement planning and budgeting, contact us today to get personal finance guidance and advice tailored toward meeting your financial goals.