Most of the retirement experts say you should look to replace 70% to 90% of your annual pre-retirement income through savings and social security payments. If you can’t replace at least 70% you may have to make some lifestyle changes to put less burden on your finances. It all comes down to percentages and calculating out how much you need.
Let’s take a look at this scenario:
- pre-tax income is $50,000
- savings of $5,000
- monthly expenses around $2,000
- you are 25
If you’re planning to retire at 65 that means you have roughly 40 years to build savings and wealth to cover at least 70% of your pre-retirement income. This calculates out to being around $1.55 million in retirement savings to cover all expenses up to 90 years of age from 65. Here is the kicker, if you were to lower your monthly expenses to $1,000 per month instead of $2,000 the total amount needed for retirement drastically lowers to around $750k. If the person above saves 10% of their yearly salary from 25 to 65 they will amass around $1.06 million. As you can see based on their lifestyle now they will run out of money and have to find other ways to gain income. They will need to lower their monthly expenses or find other ways to add to their retirement income.
You should strive to save at least 10% of your yearly salary into a 401(k) or other retirement plan.
How to Estimate Retirement Needs
Your retirement savings goal will change based on a few factors but most of it should hinge on how much you plan to spend during retirement. The easiest way to estimate is to take what your current expenses are now and use that to calculate how much you’ll need. You’ll want to try and predict if your spending will change, like if you currently don’t own a house but you’re planning to, you’ll want to calculate for this.
You also will have to consider that you won’t be moving money into retirement or other savings accounts. This means that you can already survive on 85% of your income if nothing changes in your spending habits. If you make $100,000 per year then you can survive off of $85,000 per year.
After you’ve figured out how much your spending will change, if it does, then you’ll need to figure out how much in social security you may receive. If you made $100,000 per year that would give you around $3,000 per month in social security benefits which equates to around 30-40% of your retirement income. You can expect social security to cover around 30-40% no matter how much you made.
Now that you know your spending and potential income from social security you can start to map out how much you’ll need to save for retirement. If your spending doesn’t change you can take that and multiply it by 12 and then subtract the total in social security and what you have left over is what you need to survive for the year. You then take that and multiply it by how many years you expect to live or use retirement savings for and that’s how much you need.
- Expenses: $2,500 per month x 12 months = $30,000 per year
- Social Security: $2,000 per month x 12 months = $24,000 per year
- Est. Need: $500 per month x 12 months = $6,000 per year
If you retired in the above example at 65 and planned to live until you were 90 you would need around $210,000 in retirement savings. You should always plan for more and social security may not always be there in the long run so you should strive to cover around 2x what your expenses are per month. So in this case it would be wise to have around $500,000 in a retirement savings prior to retirement.