How much money should you be saving today to reach your future financial goals? Whether retirement is decades away or around the corner, it’s important to have a savings goal and plan in mind to ensure that you and your loved ones are taken care of during retirement.
There’s no magic number or one-size-fits-all approach to retirement savings. You may need more or less than your neighbor. Let’s explore some of the things that you’ll need to consider when determining how much you need to save.
How Much Should You Be Saving for Retirement?
To calculate your retirement savings goal, consider these important factors.
How Much Do You Need to Live the Lifestyle You Want?
Experts recommend some general rules of thumb for determining how much you’ll need for retirement. But you have to consider what’s right for you and the lifestyle you want to live in retirement.
Every person has a unique story. Your needs will be different from someone else’s and vice versa. So, consider what it is that you value.
- Some people dream of traveling the world in retirement. They need to consider these extra costs.
- Other people dream of spending time with family, volunteering, and engaging in hobbies during retirement. These individuals may not need to save as much money if they live a modest lifestyle.
If you’re not sure where to start, here are a few important things to consider.
Your Current Lifestyle and How That May Change
When trying to determine how much to save for retirement, a good place to start is with your current lifestyle. Consider how much you live on now and how that may change in the future based on your goals and life changes.
For example, health care costs may only account for a small percentage of your expenses today, but they may account for 10% or more in the future. On the other hand, you may spend less on food because you’re preparing more meals at home during retirement.
You know yourself better than anyone else, so think about how your lifestyle may change during retirement and how that will impact your spending. In the above example, the cost savings on food may not offset the increased healthcare costs, so these additional expenses will need to be included in your savings.
Let’s look at some research to give you a ballpark estimate of how much retirees are spending on basic essentials. According to data from Employee Benefit Research Institute (ERBI), retirees spend about:
- 45.6% of their income on housing
- 11.2% of their income on food
- 2.7% of their income on clothing
- 9.7% of their income on transportation
- 8.3% of their income on entertainment
- 10.6% of their income on health
Again, you may spend more or less in any one of these categories, but these percentages can give you a rough idea of how much of your income will be spent on each one.
Your Income Sources
The money you save and invest for retirement on your own is just one piece of the retirement puzzle. You may also have additional sources of income available to you in the future, including:
- Social Security
- Workplace retirement accounts
- Rental income
- Proceeds from the sale of a business or your home
Consider all potential sources of income so that you have a better idea of how much money you’ll be generating during retirement.
Even in retirement, you have to consider the tax implications of your retirement plans. For example, withdrawing from a 401(k) or IRA will be considered taxable income. However, money withdrawn from a Roth 401(k) or Roth IRA will not be taxable.
- With a Roth IRA or Roth 401(k), your contributions are made after taxes. When you make withdrawals, you’ve already paid taxes on those funds and won’t have to pay them again.
- With a traditional 401(k) or IRA, taxes are deferred until you start making withdrawals in retirement.
If you have a traditional 401(k) or IRA, you’ll need to consider how taxes will impact your income during retirement.
The Expert “Rules” For Retirement Savings
Understanding your potential expenses and your income sources will help you create a ballpark estimate of how much you’ll need for retirement.
But it’s also worth considering some of the expert “rules” for retirement savings. Doing so will allow you to compare different figures to estimate more accurately.
Here are a few rules of thumb that retirement experts recommend:
- 10-12 times your income at retirement age. Let’s say that your annual income is $170,000 and you plan to retire at 67. Using this rule of thumb, you’ll need to save $1.7 million to $2.4 million for retirement.
- 80% to 90% of your pre-retirement income. Another rule of thumb is to save enough to replace 80%-90% of your pre-retirement income so that you can maintain the same lifestyle in retirement. If your annual income is $150,000, you should aim to have at least $120,000 of annual income during retirement.
These rules can help you arrive at a ballpark estimate for your retirement savings, but again, make sure that you consider your own values and priorities during retirement. These are good starting points, but you may need more or less income based on your goals and desires for retirement.
When Will You Need Your Savings?
When do you plan to retire? Your desired retirement age is one of the most important factors in determining how much retirement savings you’ll need.
The longer you delay retirement, the less you’ll need to save. On the other hand, if you want to retire early, you’ll need to ramp up your savings.
Along with your desired retirement age, consider how long you may live. It’s not unreasonable to assume that you may live to be 80 (or even longer). If you decide to retire at 65, you’ll need to ensure that you have enough income to support your lifestyle for 15 years.
Create a Plan And Stick to It
Now that you have a better idea of how much you’ll be spending in retirement, your potential income sources, and your desired retirement age, you can start creating a plan to reach your savings goal.
Creating a plan is a complicated process, and there may be some things that you have overlooked. A financial advisor can help you create your savings plan and help you stick to it.
When it comes to retirement savings and investments, emotions can easily get the best of you and send you off track. But failing to follow your plan can keep you from reaching your desired goal.
There’s no one-size-fits-all approach to retirement savings. The amount you need to save now to reach your future goals will depend on a wide range of factors, including how you want to live your life in retirement. Working with a financial advisor will help
To learn more about how KPN Enterprises can help you with retirement savings or to schedule a call, contact us here.