Retirement: After a long and successful career, you can finally say “goodbye” to your 9-to-5 job. But, wait – do you have enough money to get through your golden years? Over 20% of adults over the age of 65 (aka “retirement age”) are working or looking for work. Although some retirees work for mere entertainment, others do it because they have no other choice.
Before you part ways with your job and retire, you’ll want to make sure you have enough money saved to say afloat.
Calculating How Much You Will Need Annually During Retirement
Most retirees aim to spend less after their working years, but that’s not always the case. Newly retired individuals tend to spend the same amount of money as they did before retirement. However, as retirees age, they start to spend less. For example, those aged 75+ spend approximately $40,000 per year. On the other hand, retirees between the ages of 55 and 64 spend around $63,000 annually.
The annual amount that you’ll need to cover expenses during retirement depends on your income before retirement. As a general rule of thumb, the more income you make pre-retirement, the lower the income replacement ratio.
Fidelity Financial Solutions provides the below retirement income replacement ratio tiers:
|Annual Income at Retirement||Retirement Income Replacement Ratio|
|$50,000 – $80,000||75%|
|$80,000 – $120,000||70%|
|Greater than $120,000||55% to 65%|
Based on the guidelines provided by Fidelity, an individual making $60,000 would need $45,000 annually during retirement to cover expenses.
The Four Percent Rule
If you’re nearing retirement, you may have heard of the “four percent rule.” Following this rule, you would need to withdraw 4% of your portfolio during your first year of retirement. This withdrawal amount becomes your baseline, which you later adjust for inflation.
Let’s imagine that you have $500,000 saved in your retirement. If you follow the four percent rule, you will withdraw $20,000 to cover the expenses of your first year of retirement. Now, let’s say that inflation rises 3% during the first year. As a result, you would withdraw $20,600 for your second year ($20,000 x 1.03). You would adjust $20,600 for inflation for the third year – not the first withdrawal of $20,000.
What Percentage of Your Income Should You Save for Retirement?
Financial experts suggest saving between 10 – 15% of your annual gross income for retirement. This figure includes contributions that your employer makes towards your 401(k) plan. So, if your goal is to save 10% for retirement and your employer offers a 5% match, you would only need to put away 5% of your own money.
Those who want to retire early or didn’t start saving for retirement until later in life may decide to save more aggressively. Some tactics to retire earlier or catch up on your savings include maxing out your 401(k), opening an IRA, and contributing to a health savings account (HSA).
Where Do You Stand Now?
The Survey of Consumer Finances (SCF) reports the average retirement savings by age in the United States. If your retirement savings are hovering around or above the averages, you’re on track to reach your retirement goals.
|Age Range||Average Retirement Savings|
|75 – 79||$143,613.22|
|70 – 74||$203,964.21|
|65 – 69||$206,819.35|
|60 – 64||$221,451.67|
|55 – 59||$223,493.56|
|50 – 54||$146,068.83|
|45 – 49||$148,950.14|
|40 – 49||$101,899.22|
|35 – 39||$48,710.27|
|30 – 34||$21,731.92|
|25 – 29||$9,408.51|
|18 – 24||$4,745.25|
How to Save More Money for Retirement
Did you know that one in four adults in the United States doesn’t have retirement savings? Check out these tips to help you save more money for retirement:
Start Saving As Soon as Possible
If your budget permits, you should start saving for retirement in your early 20s. The sooner you start saving, the more money you’ll have once you reach retirement age. You don’t even need a 401(k) to begin saving for retirement; you can put funds in a high-yield savings or personal investment account.
You can use our platform to gain critical insights into your spending habits. Once you know your spending behavior, you can become more mindful of your budget and allocate more money towards retirement.
Increase Your 401(k) Contributions
A 401(k) plan comes with significant tax advantages. Beginning in 2021, the IRS will allow individuals to contribute a maximum of $20,500 to their 401(k). Note: this amount can change annually, so checking the most recent guidelines is always essential. If your employer offers a contribution match, you should contribute at least the amount of the match. For example, if your employer matches 6%, you contribute 6% of your gross pay.
Pay Down Debt As Soon as Possible
Paying down debt, especially high-interest debt, enables you to boost your retirement savings. You’ll save money by paying less interest in the long run, meaning you can contribute more to your 401(k), IRA, and personal investment accounts.
Our software lets you simulate debt paydowns, making it a breeze to minimize your interest costs. You can also track your credit utilization, ensuring that you maintain a good credit score along the way.
If you maintain a forward-thinking mindset throughout your career, you can make your golden years your best years. Here at Chunk Finance, we offer invaluable resources that help with retirement preparation.