Even though many people prioritize the need to save for retirement, they often do not have an idea of the amount of money required for a successful transition from the working world to the retirement world.

With a magnitude of factors to consider, deciding on a number before you start saving is a task on its own. Do not worry, we are here to help you figure it out. Continue reading to find out

How much money is enough savings to fulfil your retirement wishes…

Retirement Wishes

How much money do you require to retire comfortably?

According to AARP, a common rule of thumb is that you will need 70% to 80% of your pre-retirement income per year after you retire. So if you used to make an average of $75,000 per year during your working years, you may only need $52,500 to $60,000 in retirement.

This 70% to 80% estimate is based on the probability that your expenses will be lower during retirement than during other phases of life. Student loan payments will hopefully be a thing of the past and your mortgage may be paid off as well. Plus, some of your kids may have already left by the time you decide to retire.

But it is important to understand that your personal retirements could be different from these estimates. That math could look different, for example, if you have a mortgage payment for several years of your retirement or if you plan to do a lot of traveling. Depending on how much you plan to spend during retirement, you could need to replace 100% (or even more) of your pre-retirement income.

How much do you need to save to hit your retirement income goals?

Once you have estimated your retirement income needs, it is time to calculate how much money you need to save to hit that number. One popular way to do this is to use the 4% rule. This rule states that if you confine your retirement withdrawals to 4% of your total investments per year, you should never run out of money. Using the 4% rule, if you wanted a retirement income of $40,000, you’d need to have $1 million in your investment portfolio when you retire. If you think you will need $100,000 per year during retirement, you would need to save $2.5 million. A quick way to calculate how much you need to save to retire comfortably using the 4% rule is to multiply your desired annual income by 25. So if you want to live on $50,000 in retirement, you would need to save $1.25 million ($50,000 x 25 = $1.25 million). 

The 4% rule has received its share of criticism from both investing experts and researchers. Some have even pointed out that since bond yields are lower today than when the 4% rule was developed, it may not be realistic for investors moving forward. Despite its limitations, the 4% rule is still a helpful tool for ballparking how much you need to save for retirement. But if you are worried that you could run out of money by following it, feel free to choose a more conservative withdrawal rate or consider using a dynamic spending approach in retirement.

What additional income will you receive in retirement?

One of the downsides to the 4% rule is that it does not take any sources of income into consideration other than investment returns. But there is a good chance that you’ll have additional streams of income in retirement that will reduce how much you need to save.

First and foremost, you will want to consider your Social Security income. In December 2019, the average monthly Social Security income was $1,503. That’s $18,000 per year that the average person does not need to pull from their own retirement savings. 

Do you own a rental property? If so, you will have to take your rental income into account as you are thinking through your retirement savings needs. And if you plan to do part-time work after you retire from your primary career, that could significantly reduce how much you need to save as well.

Let us say you plan to spend $65,000 per year in retirement. Using the 4% rule, you would need to save $1,625,000 before you retire. But what if you know that you will bring in $15,000 per year in additional income? That means your retirement investments will only need to provide $50,000 of income per year instead of $65,000. Thus, your retirement savings number would drop to $1,250,000 which results in a difference of $425,000!

How much of your retirement income is taxable?

Do you have some money saved in a post-tax retirement account like a Roth IRA? If you do, that could also reduce how much you need to save to retire. Since you pay taxes upfront on Roth IRA contributions, withdrawals in retirement are made completely tax-free. Depending on your tax bracket in retirement, that could save you 10% to 37% in income taxes. 

Social Security income comes with tax benefits as well. If your retirement income is less than $25,000 (or $32,000 if you are married), you will not pay any taxes on Social Security benefits. Mid-range income earners may have up to 50% of their Social Security income taxed, while the most you can be taxed on is 85%. The overall point is that there is a good chance that one or more of your income streams in retirement could be tax-advantaged. That can, in turn, make a difference in how much you need to save to enjoy a comfortable retirement. 

Conclusion

Everyone’s retirement income needs will be slightly different. To calculate your retirement savings number, carefully evaluate your anticipated expenses as well as potential income streams. If you would like expert retirement guidance, you can consider setting up an appointment with a financial planner.