How much money do you need for retirement?

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The answer to the question of how much do you really need to save can be daunting, ambiguous and difficult to grasp — especially since no one knows the future.

The Employee Benefit Research Institute states that less than 50% of people have even tried to calculate how much money they will need in retirement because it’s so difficult to grasp.

But if you want to retire someday, you need to start planning as early as possible. Tweaking along the way is always an option.

You can start by asking yourself a few important questions. Then with making a few small changes, you will be able to prepare for the future and retire on your own time.

7 Big Retirement Expenses

Here are the biggest average annual expenses among older households.

  • Housing
    • Age 55-64: $18,006
    • Age 65-74: $15,838
  • Transportation
    • Age 55-64: $9,321
    • Age 65-74: $8,338
  • Food
    • Age 55-64: $6,800
    • Age 65-74: $6,303
  • Pensions & Social Security
    • Age 55-64: $6,578
    • Age 65-74: $2,788
  • Health care
    • Age 55-64: $4,958
    • Age 65-74: $5,956
  • Entertainment
    • Age 55-64: $2,852
    • Age 65-74: $2,988
  • Other
    • Age 55-64: $5,963
    • Age 65-74: $5,257

5 steps To Start Saving For Retirement Now

Here are some simple steps you can take right now to make sure you are on the right track and adequately prepared for retirement.

Don’t despair! There are some things you can do now to get a rough estimate of what you will need in retirement — even if there are unknowns and it seems overwhelming (at first).

Look at your budget

This step might be the most onerous, but if you get through it, the others will be a piece of cake!

If you already have a budget, this part will be much easier, since you’ll be basing your future spending on your current spending.

If you don’t yet have a budget, take your current expenses from the last month and record them.

For variable expenses – like a utility bill, use the average of a year’s bills, divided up into 12 months. For expenses that don’t happen every month, for instance auto insurance premiums, you will want to divide up the amount to determine approximately how much you’d be spending every month.

Determine how much you’ll spend in retirement

Write down what you think your budget will be in retirement, minus paid off debts.

Stay grounded though!

There may be fun items you’d like to create a budget for like travel, eating out, or sailing lessons. Once you’ve added these expenses and your monthly bills, you’ll have an estimate you can use for what you’ll need in retirement.

You’ll also need to use something called projected spending to calculate your estimated spending in retirement.

Projected spending

Projected spending multiplies your current income by a percentage to give you how much money you need in retirement.

This method is not completely accurate, but it does give you a good estimate to begin with when you start thinking about your retirement.

Most times, the 80% rule is used, which says you should have a goal of replacing 80% of your pre-retirement income. In other words your average income you expect to earn 10 years before you retire.

If you’d rather be on the more conservative side when it comes to spending, use the 90% rule. Conversely, if you think you’ll definitely spend much less in retirement, calculate 70% of your pre-retirement income.

When you factor in social security, this can move the percentage down more. I like to think of social security as a bonus. If I get it then GREAT!, but if not then I was prepared otherwise.

Remember this number is just an estimate to get you started!

The 4% rule

Once you’re in retirement and you’ve got a bunch of money stashed away, you’ll want to keep the 4% rule in mind.

What is the 4% rule?

The 4% rule maintains that you can safely withdraw 4% of your retirement savings each year without running out of money.

Find out if you’re on track for your retirement

How can you know if you’re on track?

Here are some ways you can do that

Consider benchmarks

Many investment firms and financial institutions have done research to determine how much to have saved at a particular age, depending of course on spending and income.

For instance, JPMorgan Asset Management’s 2016 Guide to Retirement reports that someone age 40 with an annual household income of $100,000 should have 2.6 times that amount put away for retirement, and by age 60, that multiple should be 7.3.

Fidelity Investments reports investors should have 1x their income at 30, 3x at 40, 7x at 55 and 10x at 67.

According to JP Morgan, someone who is 40 and has a household income of $100,000 should have $260,000 saved. Fidelity Investments says the same individual should have $300,000 saved.

Numbers may vary, but benchmarks are good starting points for getting an idea for how much you’ll need.

Use an online retirement calculator

An online retirement calculator can also help you determine how much you’ll need.

A good calculator factors in items such as

  • Projected inflation
  • Life expectancy
  • Market returns.

Financial advisors caution savers about using benchmarks, calculators and charts as concrete tools for retirement savings.

But, these kinds of tools can help you begin to think about retirement and help you determine if you are headed in the correct direction – always a good thing.

Sit down with a fee-only financial planner

If you really want to have more peace of mind about your retirement, it’s very helpful to sit down with a fee-only financial planner at least once to talk about your retirement.

The reason why you want to use this kind of retirement planner is because they are not paid on commission — they are paid to give you the best recommendations.

There is no one-size-fits-all approach to retirement and every situation is different, so a fee only financial planner can help you make the best decisions for your unique situation.

Create a plan, and make changes as needed

After considering everything you need to take action and create a plan to help you get to your savings goals.

Are you saving enough? Should you curb some spending? Should you eliminate debt? What about suggestions from the fee-only financial planner?

Remember even small changes can add up to make a big difference over time

Revisit your plan regularly

Finally once you’ve committed to what you’re going to do and how you’re going to get there, revisit your plan at least yearly to stay on track.

As you continue to monitor your finances, make adjustments as your life changes to keep on track.

Making a point to continually come back to your finances to see where you are will help you see the progress you’ve made, and keep you on track for the future. This in turn, will help you have peace of mind when it comes to your retirement.

Saving For Retirement Summary

Though it initially may seem daunting, saving for retirement is essential to maintain a good quality of life and achieve your goals.

There are five action steps you can take to help you plan how much you need

  1. Figuring out your budget
  2. Determining spending
  3. Determining if you are on track
  4. Creating and implementing a plan
  5. Monitoring your plan and making adjustments

If you follow these steps and get expert advice you will make progress towards saving for your well-deserved retirement. And you will feel confident and secure that you can continue to maintain your quality of life and achieve all your goals.

2 COMMENTS

  1. Just a comment on budgeting,like I have said before on esimoney, don’t waste your time budgeting,put away 50% of your net for long term and live off the rest,until you retire.
    This solves lifestyle inflation and prevents one from financially devasting mistakes,I have been able to amass 25years living expenses in 12 years by following this method.Anything left over after rent and food is mine to enjoy guilt free.No llife hacks,side hustles needed,emergency fund is a credit card with a $30,000 limit so that all cash stays invested,with 18 yrs to go until official retirement,laugh all day at work no stress with FU money.
    On real estate you rent,have never paid more than $700/ mth for rent,currently pay $500/ mth and that includes everything but cell phone bill,30 minute pedal to work.
    I live in a Vancouver BC suburb and work as a tradesman making between 60-90k year.

    • Looking at things in a simple way is the best especially since much of money is behavioral. Hence, the boom in behavioral economics. The only thing that seems different is the credit card as an emergency fund. I have heard this before and both sides of the argument have merit. Currently I’m not sure where I stand.

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