How Much Do You Need To Retire?
A lot goes into figuring out how much money you need to retire, but one common piece of advice is that you need about $1 million — and some sources suggest even more. In fact, according to a 2021 survey by Schwab Retirement Plan Services, people commonly believe they need to save $1.9 million to be able to retire.
You can spend your golden years living on less than $1 million — and still live well. To figure out how much you’ll need to retire, you must assess your lifestyle needs, understand your risk tolerance, consider the effects of inflation and, most importantly, learn how to create a budget and follow it.
Planning Retirement Savings Is About Spending, Not Income
What many people might not realize is that retirement planning isn’t so much about how much you earn, but how much you spend. Your lifestyle today can have an impact on how much money you have left over in your retirement years.
“I have met people who make $30,000 take-home per month and still have no retirement savings,” said Jeff Rose, founder of Alliance Wealth Management, a financial planning firm. “Keep your lifestyle in check and make sure you are putting money away every month. Set a benchmark based on what (you) need per year and plan to live to 100.”
You might have heard you’ll need 55% to 80% of your preretirement income to live well, but with some budgeting and lifestyle changes, it’s possible to live on less. “A person or couple that has no house payment or car payments can live off less than 70%,” Rose said.
Living on Less: How To Make a Budget for Retirement
Spending peaked at $71,166 per year for the 45-to-54 age group, then dropped to $38,691 per year for people 75 and older — a figure that shows a trend of spending less and living more simply in the golden years — according to the Bureau of Labor Statistics of the U.S. Department of Labor. With a reduction in overall expenses, it’s easier to live well on less during retirement.
Drive Less or Use Cheaper Transportation
The typical senior between 65 and 74 spends $8,420 on transportation costs annually, according to the BLS. If you opt for an economy car, you can save money on gas and on the actual car because it will cost a lot less than a luxury model. You might also consider using public transportation.
Downsize Your Home
The best places to retire might not be where you lived preretirement. Selling a home in California or the Northeast U.S. would enable you to buy something cheaper in, say, Detroit or Philadelphia — and you’d likely have cash left over.
Cut Back on Entertainment
Spending less on things like dining out is an easy way to cut expenses. Be coupon-savvy at the grocery store and buy only what you need. Seek out low-cost activities with a senior discount, or clubs and organizations aimed at your age group.
Rely More on Investments Than Benefits
Your liquid savings probably won’t be your only assets when you enter retirement. Any employer-sponsored savings you’ve accrued can significantly supplement your retirement savings and any other nest egg investments you might have — like annuities or CDs — can also help when you retire.
Experts advise that with current and forthcoming Social Security trends, it’s not wise to rely solely on Social Security benefits to fund your retirement. “Right now, I would plan on getting 70% of the Social Security income we are being promised,” Rose said.If you are looking to further build your portfolio or want to start investing, check out these safe, high-return investment options.
How Much Money Do You Need To Retire?
Estimating how much money you’ll need in retirement can be a difficult task. Here’s a starting point to find what your average monthly income in retirement should be:
- Calculate your current monthly income and your monthly expenses.
- Factor in lifestyle changes that might occur, like a cost of living adjustment, healthcare needs, travel plans and expenses, and money you plan to spend on kids and grandchildren.
- Subtract what you’re currently investing each month in your individual retirement account or Roth IRA. Although you can contribute to a Roth IRA as long as you live, you likely won’t after you retire, and you can only contribute to a traditional IRA until you turn 70.5.
- Factor in any pensions you’ll be receiving as part of your income.
- Subtract the amount of taxes you’ve been paying on your current paycheck because you won’t be paying them anymore.
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When you do these calculations you’ll end up with a retirement budget. You’ll be adding all of your income, subtracting your expenses and seeing how much — more or less — you’ll need to live on.
Should I Retire Now?
No hard-and-fast rule mandates you must retire at 65. More seniors are choosing to work past the retirement age nowadays, and some are foregoing retirement altogether.
Social Security offers financial incentives to delay retirement. Currently, the retirement age for a worker born between 1943 and 1954 is 66. According to the Social Security administration, a 67-year-old worker will receive 108 percent of their monthly Social Security benefit because they delayed receiving benefits for a year.
Additionally, at 70, they’ll receive 132 percent of their monthly benefit because they delayed getting benefits for four years. After age 70, however, the monthly benefit for delaying retirement stops increasing.
Avoid Retirement Pitfalls
Now that you have a better idea of what to do to save for your later years, remember to avoid some of the potential pitfalls, like carrying debt or prematurely withdrawing retirement funds.
So, how much do you need to retire? Aiming for $1 million is a great goal to have. But if you retire on less, with a bit of budgeting, you can still have a happy, healthy retirement.
Information is accurate as of June 15, 2022.
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- Charles Schwab. 2021. "Schwab 401(k) Survey Shows Sharp Increase in Confidence and Demand for Financial Advice."
- Social Security Administration. "Delayed Retirement."