How Much Money Do You Need To Retire?

Financial advisors recommend saving a certain percentage of pre-tax salary. For young workers, this may mean putting 10% to 15% of annual income into retirement savings accounts. Those beginning to save later will need to save a greater percentage. Some retirement experts recommend having 10x your final salary saved for retirement.

One of the first steps in planning for your future is understanding how much money you'll need for retirement. No magic number or formula guarantees you'll have what you need. But, with some planning, you can take steps toward setting up a comfortable retirement.

The amount you'll need for retirement depends partly on your earnings and savings. As a rule of thumb, you'll want to be able to live on approximately 80% of your pre-retirement income to keep your current standard of living.

Many people are concerned about historic and rising inflation and a possible economic recession. You can make a few investment choices to mitigate the impact of inflation and recession on your nest egg. These choices include ensuring your portfolio is well diversified and that you save early and invest often. You may also want to cut back on spending as you near retirement. Consider consulting with a financial advisor about how inflation and economic recession impact the stock market and your portfolio.

Consider Your Costs in Retirement

Planning for longer retirements and associated costs is essential as people live longer. The Department of Labor suggests planning for a 20-year retirement. What money will you need to live comfortably for those years? Here are a few things to keep in mind when making your calculations:

  • Longevity and health: You can estimate your lifespan based on your birth year. But it's also helpful to consider family medical history, medical issues, and general health factors. If you have a severe medical condition like heart disease, consider including long-term treatment or long-term care costs in your calculations.
  • Increased costs over time: Rising health care costs and inflation mean that money saved today will have less spending power tomorrow. You will want to keep much of your retirement savings in accounts that offer a return on investment at or exceeding inflation rates.
  • Retirement lifestyle: Planning to live off of 80% of your income in retirement is often recommended. But you may want to adjust this amount depending on your desired retirement lifestyle. For example, if you intend to travel a lot, you may want to save more than 80%. Conversely, saving less than 80% may be appropriate if you plan to downsize.

Online retirement calculators can estimate how much you need to save. One online calculator helps workers plan for retirement later in life.

Start With What You Have

Calculate your assets, such as cash, investments, property, stocks, and bonds. Include any money in employer-sponsored retirement plans, like 401(k) plans. Consider whether you have a pension. This is all money that can be counted towards your retirement savings.

Remember that you may be entitled to Social Security Administration (SSA) retirement benefits. Your Social Security monthly benefit amount may be a significant income source for you in retirement. It may replace around 40% of your income if you had annual earnings of approximately $60,000. Check your latest Social Security statement for an estimate of your Social Security retirement benefits.

If you wait until the full retirement age of 67 to collect, you will receive 100% of your benefits. If you retire early, you will receive a lowered monthly benefit. Social Security benefits include an annual cost-of-living increase designed to combat inflation. But remember that, depending on when you retire, the SSA may be unable to pay you full benefits. This is because the Social Security trust funds are scheduled to deplete in 2033. The SSA will pay only 77% of scheduled benefits at that time.

Selecting the Best Retirement Plan for You

There are many types of retirement plans. These include 401(k) plans or individual retirement plans (IRAs).

Most work-sponsored 401(k) plans offer matching employer contributions. Under these plans, if you contribute a percentage of your income to your 401(k) plan, your employer will contribute the same amount, up to a maximum rate. It makes sense to take full advantage of your 401(k) matching contributions to avoid leaving money on the table.

401(k) contributions are tax-deferred, meaning you only pay income tax to the IRS once you withdraw it. There are annual contribution limits with a 401(k). After 50, you are allowed to make greater "catch-up" contributions. You must begin taking distributions by age 73 but can start collecting retirement income without penalty at 59-1/2. Roth IRA 401(k) plans, offered by some employers, allow you to withdraw your contributions at retirement tax-free.

If you don't have access to a workplace retirement plan, or even if you do, you can open an individual retirement account (traditional IRA) or an annuity for additional retirement savings vehicles.

Get Professional Legal Help

Ensuring you and your loved ones are provided for in retirement can be complex and daunting. But it's not something you need to do alone. Contact a financial planning lawyer or Social Security retirement attorney to discuss retirement savings plans and investment strategies. A professional can help you balance your risks and potential returns.

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Can I Solve This on My Own or Do I Need an Attorney?

  • The initial Social Security process doesn’t require an attorney
  • An attorney primarily handles claims that are denied
  • It can be helpful to have an attorney during Social Security benefit disputes or appeals

A Social Security lawyer can help protect your rights to your benefits.

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Don’t Forget About Estate Planning

Now is a great time to consider creating or revising your estate plan. Protect your assets through a will, decide who can make financial decisions for you through a power of attorney, and ensure you make important health care decisions through a health care directive. You can create these critical documents online using DIY estate planning forms.

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