Setting the right retirement savings goals is important to achieving financial security in your later years. Unfortunately, too many people haven’t figured out how much money they’ll need to live on after leaving the workforce. And there’s a good reason for that: It can be tricky trying to estimate how much you’ll need for decades to come.
Fortunately, there are two simple tried-and-true methods for estimating how big your savings should be. Consider choosing one of them so you can set a savings goal to ensure you are well-provided for in your later years.
1. Assume you will need 80% of your pre-retirement salary
When you retire, some of your costs will likely go down. You won’t be traveling to work, and you may owe the IRS less if some of your income isn’t taxable or you drop to a lower tax bracket. You also won’t have to save for retirement, since you’ll already be in it.
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Because of this, many experts suggest that you should replace about 80% of your pre-retirement income as a retiree. Now, this is the amount you’ll earn right before you retire, so you’ll need to estimate what it will be if you’re many years away from leaving the workforce. You can do this by adding 2% per year to your current salary between now and retirement. So if you’re making $50,000 this year, I’d assume you’d make $51,000 next year and $52,020 next year and so on. After calculating what your final salary will be, assume you need 80% of that amount to live comfortably as a senior.
You’ll get Social Security benefits to provide some of this income, so you’ll want to take that into account when calculating how much money your retirement account should produce. You can find your estimated monthly Social Security benefit by signing in to your mySocialSecurity account. If you find that you will get $19,000 in benefits and you estimated that you would need $60,000 in retirement income, you can figure that your savings should produce $41,000 per year.
Once you know how much income you’ll need from your retirement accounts, it’s easy to estimate how big your savings will need to be to produce it. If you follow the common 4% rule and withdraw 4% of your account balance in your first year of retirement before adjusting each year for inflation, you can simply multiply the amount of income you want by 25. If you need the $41,000 mentioned above, this would mean saving $1,025,000.
2. Plan to save 10 times your last salary
If all that math sounds too complicated, there’s an even easier way to set your retirement savings goal. Assume that you will need 10 times your final salary.
Of course, you’ll still need to estimate how much your final salary will end up being before you leave the workforce. But once you do that, it’s just a matter of simple multiplication. If you determined that your final salary would be $75,000, your goal would be to save $750,000.
Both approaches can help you make a reasonable estimate of the amount required for retirement. Once you’ve done these calculations, you can use the calculators at Investor.gov to break down your big goal into a smaller monthly goal. Then, just make sure you’re contributing enough to a tax-advantaged retirement plan to end up with the funds you need for a comfortable life in retirement.
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