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4 steps you can take to get your retirement savings plan on the right track

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Saving enough to provide 70% and 80% of your pre-retirement income annually is a general rule of thumb.
  • Target savings will vary for each future retiree, depending on one's expenses and current salary.
  • Many advisors recommend saving 15% of your earnings annually, or even more if getting a late start.
  • Multiple income streams and a conservative withdrawal rate ensure that you don't run out of money.

After committing to a career for many decades, retirement is a long-awaited milestone. Saving enough to support you through this phase of life, however, can require many years of financial dedication.

According to a 2022 Gallup survey, the mean age for retirees in the US is 61. If you were to live to 85, this means you'd need enough money to cover all your expenses (and retirement goals) for at least 23 years. Oh, and don't forget about factors like inflation, which will certainly have an impact on your savings over time.

How much do you need to retire comfortably? 

While it would be easy to just throw out a generic figure, the fact is your individual retirement savings target will be very different from your siblings, your neighbors, and even your co-workers' goals. That's because the amount you'll need depends on a few key personal factors.

But there is one important rule of thumb that applies to everyone: The sooner you start saving, the less effort you'll need to put in to reach your goal, and the better positioned you'll be later in life.

Here are four important steps to take to determine just how much money you'll need to save:

1. Calculate how much you'll need to save during retirement

Understanding what you expect retirement to look like will help determine how much you'll need in order to fund that lifestyle. If you plan to travel the world in luxury, your budget will be a bit different than someone who just wants to birdwatch from the backyard each morning.

In retirement, your savings will cover many of the same expenses that you had prior to retirement. These include: 

  • Food
  • Shelter
  • Transportation
  • Clothing
  • Gifts
  • Utilities
  • Insurance (including a health plan)
  • Travel

If you don't plan for any of these categories to change much from pre- to post-retirement, then you should have a good idea of your budget. However, if you have big plans for your retirement years, it'll be important to determine how much your new standard of living will cost. Insider's free retirement calculator can help you plan by plugging in the numbers.

Also be sure to account for unexpected expenses that could come up, such as medical care for you and your spouse, or even helping a child or grandchild financially.

"The most common expense that a retiree can ignore (or forget to budget for) is end-of-life expectancy expenses," says Jim Ludwick, a CFP founder of MainStreet Financial Planning, Inc. "This includes caregivers coming to your house, going into assisted living, or skilled nursing. Those are very expensive parts of people's lives. And a lot of times that can eat up quite a bit of savings, if it goes on for an extended period of time."

Next, consider where you plan to live. You may want to downsize, or you might plan to buy your dream retirement home. Either way, be sure to factor in all those costs.

Don't forget to consider inflation and the impact this will have on your savings. For instance, in 2022 alone there have been inflation rates of 6.5%, following the 7% inflation increase in 2021. While this is well above average, you should account for inflation of approximately 2% per year.

2.  Break down how much you should be saving each year

Now that you have an idea of how much you'll need, you can begin calculating how much you should be setting aside annually.

One simple way to determine your savings goals is to aim for a multiple of your current annual earnings. While the actual amount varies according to your projected retirement costs and even the specific investments you choose for your retirement portfolio, these serve as a rough target and give you a better sense of where you stand.

According to Fidelity, here's how much you should have saved up each decade in order to meet your retirement goals:

Age

Annual salary allocated for retirement

30

1-2 times

40

3-4 times

50

6-7 times

60

8 times

67

10+ times

To reach these targets, many financial advisors, planners, and asset managers suggest a dedicated savings rate of 15% of your annual income. However, you may need to save even more, depending on what retirement will look like for you, what sort of financial obligations you expect to have in retirement, and your current assets.

The sooner you start saving, the easier it will be to compound your savings and reach your goals by the time retirement arrives.

3. Consider other sources of income while retired

There are multiple savings vehicles and income streams to consider for retirement. These can affect how much you need to save today, depending on which sources of income are available to you.

Social Security benefits are offered to retirees aged 62 or older (or those who become disabled or blind), who have earned enough credits throughout their career in order to qualify for the program. This can provide a steady income stream in retirement. For example, someone born in 1970 who earns $60,000 per year can retire at age 67 with $1,999.00 in monthly Social Security benefits. That's nearly $24,000 per year that your retirement savings will not need to cover.

A pension plan can also provide you with a steady, monthly income stream. If your employer has one, you'll need to ask if you qualify, how much income this will offer, and what the pension requirements are.

Annuities are another retirement income source to consider. They're offered by insurance companies and act as a long-term investment vehicle. After purchasing an annuity — either with a lump sum or periodic purchase payments — you will receive regular payments over the course of your retirement.

A 401(k) is one of the best retirement savings plans. These employer-sponsored investment vehicles allow you to save and invest as much as $22,500 per year in 2023 — or as much as $30,000, if you're over the age of 50 — toward your retirement.  The money in a 401(k) can be invested in a variety of different securities, and your contributions may even be matched by your employer, amplifying your efforts. Funds can be distributed without penalty beginning at age 59 ½, or earlier with certain exceptions.

An IRA, or individual retirement account, can be opened at any number of financial institutions, including banks, credit unions, and brokerages. There are two primary types: the traditional IRA and a Roth IRA. Each offers its own tax advantages, depending on your specific situation. For 2023, individuals can contribute up to $6,500 into an IRA annually, which can be invested in various securities and even real estate. If you're over 50, you can put up to $7,500 into an IRA each year.

There are other plans and investment options available, but these five are the most common among retirees.

Check out our guide to the best IRA accounts

4. Know the general rules of thumb when planning for retirement

While everyone's situation and needs will be different, there are a few primary rules of thumb that most financial advisors follow, which you should consider when determining how much to save for retirement.

Retirement income as a percentage of pre-retirement income

Many financial professionals recommend that you account for between 70% and 80% of your pre-retirement income each year in retirement. This means that if you currently earn $60,000 per year, you should plan to spend between $42,000 to $48,000 annually once you retire. 

This isn't a set rule for everyone, and you may need to even account for more savings. "Many people need to have income streams (or savings and investments) cover 80%, 90%, or even 100% of their pre-retirement budget," Ludwick says. It all depends on your specific expenses now and in retirement.

Saving 15% of your earnings every year

If you start saving for retirement early enough, an annual savings rate of 15% may be sufficient to meet your goals. If you're off to a late start, you may need to save a lot more each year in order to catch up. 

"As you get older, the amount needed for savings to reach the same end goal roughly doubles every 10 years," says Tolen Teigen, chief investment officer for FinDec. "So, if someone waits ten years to start saving, instead of 30, they are now 40. Instead of 8% to 10% annually, they are now looking at 16% to 20% saved to reach the same end number."

Saving 10 times your income by retirement age

As mentioned above, many financial advisors and firms like Fidelity recommend having approximately 10 times your annual salary saved by the time you reach retirement age. While this may not be exactly what you need, it's a good target to keep in mind as you go. You can always adjust it depending on your projected needs in retirement.

The 4% rule

Many retirees are concerned about running out of money once they hit retirement. To avoid this, the 4% rule may be a good guideline. 

This rule states that retirees can withdraw up to 4% of their retirement savings in year one of retirement. So, if you have $2,000,000 in retirement savings, you would withdraw $80,000 that first year. In year two, you would adjust that $80,000 for inflation, and withdraw that amount from your savings.

While many factors can affect the actual drawdown process, the 4% rule can be a good place to start if you want to avoid running out of money.

Saving for retirement is different for everyone

There is no one-size-fits-all approach to saving for retirement. Everyone's needs will be different, and so will their approach to saving, including when they start and how much they can set aside each year. Consulting with a certified financial planner or other retirement expert is really the best way to understand your unique needs.

"Planning ahead and checking in on your efforts" is key to saving enough for the retirement years, Ludwick says."It's dangerous when you're 75 and realize you're running out of money and you have to move in with a younger sibling or something." 

His advice? "If you want to stay independent, do your homework ahead of time. Think about all those things that could possibly happen. If they don't happen, you're lucky … and your kids and grandkids can have a nice gift that you leave behind."

Saving for retirement frequently asked questions (FAQs)

Can you retire $1.5 million comfortably?

You may be able to retire comfortably with $1.5 million in savings. However, a recent 2023 survey by Charles Schwab found that most Americans will need $1.8 million to retire. While it can be hard to actually tell how much you will actually need during retirement, factors like lifestyle and how long you plan to live. You'll need to consider where you live, how you're living, and whether you're receiving Social Security benefits or have a pension plan. In order to best determine how much you'll need in retirement, talking with a financial planner and creating a financial plan may be your best bet. 

Can you retire with $2 million dollars?

Yes, you may be able to retire comfortably with $2 million dollars. It's hard to say how much you will actually need during retirement depending on factors like, Social Security benefits, lifestyle, inflation, and how long you plan to live. A retirement calculator can help you determine how much you need to save. You can also meet with a financial planner for guidance on establishing a financial plan. 

How much should you save for retirement by age? 

Fidelity recommends that you should have saved one to two years' worth of your salary by the time you're 30, three to four times by the time you're 40, six to seven times by the time you're 50, eight times by the time you're 60, and ten times by the time you're 67.

How much should you save for retirement?

The first step to adequately saving for retirement is to determine how much you'll need in the first place. This means analyzing current and future expenses, and deciding how much you can afford to put away each month. You may also want to use a number of different savings and investment vehicles or income streams.

Aim to have saved around 10 times your current salary by the time you reach retirement age. Prior to retiring, reduce your annual expenses as much as possible. This can help stretch your retirement savings for even longer. 

As always, it's wise to consult with a trusted financial planner to help you determine your unique needs and retirement savings strategy.

Read the original article on Business Insider







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