What Do You Need to Fund Your Retirement?
by Tamika Johnson
There's some old conventional wisdom that says you'll need from $1 million to $1.5 million in retirement. Others say that you will need 10 to 12 times your current income. In fact, a true retirement number is different for everyone, and is dependent on such factors as:
- Where you'll live.
- How healthy you'll be as you age.
- How long you'll live
There's no magic amount you should strive to attain, but there are some questions you can ask yourself to find your optimal number:
What will your living costs be?
Will your nest egg last as long as you will?
- Figure out how much you're spending now. Create a budget to track your expenses.
- A rule of thumb is that you'll need 70 to 80 percent of your preretirement income after you finish working, although some financial planners say that won't be enough.
- Others say 100 percent of your preretirement income each year for at least the first 10 years after you stop working is more like it.
- The point is that spending doesn't slow down in early retirement, especially if you ramp up travel.
Will your savings generate enough cash?
- Consider longevity when you set savings goals.
- People are living longer, and that makes retirement planning that much more challenging.
- Savings need to be adjusted accordingly.
What if you haven't saved enough?
- Future interest rates and inflation are always unknown.
- As a retiree, to generate $40,000 a year after stopping work, you'll need savings of about $1.18 million to support a 30-year retirement. This is based on average returns of 6 percent and inflation at 2.5 percent. (Of course, these assumptions can change!)
Are you overestimating how long you'll stay in the workforce?
- Don't throw up your hands if the number above seems out of reach.
- Save, save, save — you can double, on average, your nest egg in the last decade or so of your working life due to compound interest.
- Go from two cars to one, and cut back on travel to keep spending low.
- If the market delivers its historically typical 7 percent annually, your money doubles every decade. But again, the market doesn't always do what we expect.
Don't forget health care.
- Do you need to adjust your expectations or scale down your expenses?
- Find ways to increase the income available to you in retirement.
- It's hard to predict the future.
Taxes — how will they affect your retirement spending?
- Health care is expensive. Prescription drug use, added into health care spending, may mean close to $6,000 annually.
- Seniors statistically are more likely to experience major health care emergencies.
- Consider having a separate dedicated fund — maybe a health savings account — to put money into to cover your care during retirement.
- Will your house be paid off? Will you want to indulge your hobbies? Will entertainment expenditures go up?
- You'll be taxed on withdrawals from many retirement investment accounts, although it may be lower than when you were working.
- If your income is high enough, you could be taxed on as much as 85 percent of your Social Security benefits.
These are just the basics. Everyone's situation is different, and you will need to go beyond these rules of thumb. What is clear is that you need to plan ahead as much as possible, and be sure to get professional help with the details.