Most people know that they have to save for retirement, but many people underestimate how much they need to save to live comfortably.
In the United States, the average person with a 401(k) believes that they will need $1.9 million to see them through retirement.
This is a huge amount of money, but most retirees aren’t investing enough to reach this value.
It can be hard to know if your retirement income will be enough to see you through your golden years (You might want to check out how retirement ratios work here).
However, you can get a better understanding of this by working out what your retirement costs might be.
You’ll learn how to do this in this article, as well as how to estimate what your retirement income might be.
Estimating Retirement Costs
You can work out what your retirement expenses might be through several formulas, though keep in mind that most of these will be rough estimates.
A good rule of thumb to follow is that you’ll need around 80% of the costs you spend entering retirement.
This is contingent on the reality that some important expenses may decrease within retirement, like travel costs and retirement plan contributions.
Despite this, other costs might increase along with this, like healthcare and vacation prices.
Several retirees say that their costs within the first couple of retirement years were more than what they spent in their working years.
This may be the fact that retirees have more time on their hands, so they spend this by spending and going out more often.
Retirement expenses usually go through three significant stages, which are:
- Spending more earlier on
- Spending moderately for many years after the first stage
- Spending more near the end of lifespan, due to long-term care and healthcare costs
Estimated Living Standards
It can be hard to estimate what your future costs might be if you are still well within your working years.
However, as you get closer to your retirement age, you’ll gain a better sense of the amount you’ll need to maintain your present living standards.
Once you establish a base cost, take away any expenses that you predict won’t be necessary after retirement, then factor in any new costs that may occur. This will give you a rough idea of what you might need.
Make sure that you take any larger bills into account too, like travel costs, new kitchens, or predicted surgeries.
The same goes for any large bills that you might save, like if you plan to move to a smaller home with fewer expenses.
How Much Money Do You Need To Retire?
Most financial advisors use the 4% tolerable withdrawal rate, at least to start with.
This is how much you can withdraw in ideal and less ideal circumstances, while still anticipating your portfolio might last a minimum of thirty years.
People differ as to whether a 4% withdrawal rate is favorable or not, but they tend to agree that you shouldn’t go over this.
If you go with the 4% rate, you may be able to withdraw the following amounts from three various nest eggs.
- $500,000 to $20,000 annually
- $1 million to $40,000 annually
- $2 million to $80,000 annually
To work out how much income you might need to retire with, take your rough monthly costs and divide them by 4%.
For instance, if you think you might need $50,000 every year to live with, divide $50,000 by 0.04. This will mean that you’ll need $1.25 million to retire with.
Income During Retirement
As we’ve worked out a rough idea of your retirement costs, you now need to figure out if your income will be sufficient enough to pay for them.
You can estimate this by adding up expected income from three important places:
- Retirement saving accounts
- Pension schemes
- Social Security retiree benefits
Social Security Retiree Benefits
Those that have been working and paying into the Social Security system for a minimum of ten years, and have at least 40 credits, can obtain an estimate of their Social Security retirement benefits.
You can do this with the Social Security Retirement Estimator, found online. Keep in mind that this will deliver a more accurate value when you are nearer retirement.
However, you will earn less monthly the sooner you take benefits. These can be taken as early as 62, or as late as 70.
There’s no point in waiting after 70 to take the benefits, as long as you are over 70, you’ll receive the total amount.
Outlined Pension Schemes
If you are receiving a pension from a former or a present employee, you can gain an estimate of what this value will be from the scheme’s benefits administrator.
Those with a spouse may want to consider their possible income under various scenarios.
This may include receiving benefits through survivor and joint annuities. These will keep paying a particular portion of your benefits to your spouse if you pass away before them.
Retirement Saving Accounts
Retirement saving accounts are IRAs, 401(k)s, and health savings accounts, as well as any other savings accounts you might have assigned for retirement savings
Standard 401(k)s and IRAs state that you need to begin RMDs (required minimal distributions) once you turn 72.
Keep in mind that Roth IRAs won’t have RMDs within your lifetime, but Roth 401(k)s will (Find out The Pros and Cons Of A Roth IRA here).
These RMDs will establish how much income you can earn from these savings accounts after you reach 72.
However, you can withdraw funds from 401(k)s and IRAs without fines once you reach 59 ½.
Once you do the calculations, if your total retirement earnings go over your anticipated costs, you’re likely to have enough money for retirement.
If it seems like you won’t have enough, you’ll need to make a few changes and find out how to increase your earnings and reduce your costs.
This may involve working more years, cutting back on spending, or moving to a home with fewer expenses.
If you start thinking about retirement income earlier, you’ll have more years to make wise financial decisions for your future.