Even before the age of 50, people have chalked their retirement plans. From post retirement occupations to alternative lifestyles, individuals in the 21st century seem to have it all under control. Most people are keen on setting up an investment fund that is solely dedicated to financing their life after retirement.
But how much money do you need to retire?
There is no exact answer to this question. The traditional school of thought states that an average person will need at least 80% of his pre-retirement income to lead a stable life. However, all the income doesn’t necessarily have to come from your savings.
To facilitate the process, we have devised a guide for you to calculate how much money is required after retirement.
Your Income: How Much?
The level of money you need primarily depends on your current income. For instance, if you are earning about $100,000 right now, you will need approximately $80,000 per year, post retirement. The core idea is that a myriad of expenses will be eliminated after retirement. You won’t have to save up for the post-retirement life or give out your salary in monthly commuting costs.
Thus, this typical move is more commonly known as the “retirement withdrawal strategy” and it works effectively for retirees looking to cut down on their costs. However, this may not work for everyone but whoever wishes to opt for this plan can make changes to their costs as per their will.
A Stream of Income Sources:
If you’re still worrying about how much money do you need to retire, stop right now. You will be able to get significant help from sources apart from savings. For instance, Social Security provides 40% of an average American’s pre-retirement income by themselves. If you’re uncertain about the amount available to you, check your Social Security Statement or create an account to obtain a fair estimate that is based on work history.
Additionally, if you have pensions from previous workplaces, care to take those into account as well. To give these words a proper number, try calculating your monthly retirement income through the formula highlighted below:
Monthly income required: Estimated monthly retirement expenses-Monthly Retirement Income from other Sources
How Much are Savings?
As established above, you should first determine the level of income that needs to be generated from your savings. Next, calculate the extent of your retirement fund that is required to produce this much income.
One simple option is to take the help of a retirement calculator, or stick by the 4% rule. The 4% rule may have its own set of drawbacks, but it serves as a safe starting point to withdraw an annual amount. According to this rule, you can withdraw 4% of your retirement savings in the first year of retirement.
For example, if you have $2 million saved, $80,000 will be taken out in the first year in a full amount or through a series of payments. In the coming years of retirement, you can then keep on adjusting this amount to keep in line with living expenses.
The essence of the 4% rule is simple- to distribute the money in a manner where it lasts a good 30 years.
In order to calculate a retirement savings target, use the formula listed down below:
Retirement savings target = Monthly income required x 25
Summing it Up
While planning out your retirement strategy, do remember that there is no right or wrong. What may work for others will not necessarily be in your favor. Hence, plan according to your own income and lifestyle. If need be, you can always keep referring to our guide for making a more informed decision.