How much money you'll need to save every year to achieve your retirement goals depends on a number of personal factors that include: your life expectancy; your desired lifestyle; whether you want to help your family financially; your health care costs; inflation; taxes; and your average return on investment in your retirement accounts. Thus, it is important to sit down and write out your individual retirement goals. Retirement planning can be as simple or complicated as you make it and working with a financial planner can help this process immensely.
A major factor in determining how much you will need to retire is how many years you need to live off of your retirement income. If you only plan to need two years worth of retirement income, your needs will be much less than someone who needs 30 years of retirement income. As a good rule of thumb, you should overestimate the number of years you'll need retirement income. You don't want to get into a situation where you're outliving your retirement income.
Age of Retirement
The age you choose to begin your retirement influences how much money you need to save in order to provide your desired retirement income. Typically, the later you retire, the less you have to save every month. This is because your investments will have more time to appreciate before you draw on them. Furthermore, if you choose to retire later, you can begin selectively liquidating high-performance equity positions to lock in your profits.
As a rule of thumb, most retirees should aim to replace approximately 70 percent of their pre-retirement income. For example, if you're making $50,000 per year before retirement, you'll need at least $35,000 per year in retirement income. The good news is that Social Security benefits will help you towards this goal. Several online retirement calculators can help you determine how much you need to save to provide a certain level of income in retirement. Find a link to one in the Resources section.
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Social Security Benefits
Social Security benefits can be a major source of income for you to factor into your retirement plan; however, you will still need to replace your income during retirement with other sources. According the RETIRE Project, which is an ongoing research project conducted by Georgia State University's Center for Risk Management and Insurance Research Center and Aon Consulting, Social Security benefits will replace approximately 43 percent of pre-retirement income for a single-filer who makes $60,000 a year before retirement. Generally, the more you earn, the less of your income Social Security benefits will replace in retirement and vice versa. For married couples, Social Security may replace more or less pre-retirement income depending on whether both spouses worked before retirement, their earnings, and whether spousal benefits are available. You can get a rough estimate of your likely Social Security income through the Social Security Administration link in the Resources section.
The amount of expenses you have in retirement also impacts how much money you need to save to provide your desired retirement income. While some expenses should decrease during retirement, others will increase. For example, most retirees have their home mortgage paid off and no longer have to eat out for lunch every day at work. Commuting expenses may also be gone. However, expenses for leisure activities such as golf and travel may increase. Thus, you need to carefully consider the costs associated with your desired lifestyle as you estimate how much income you'll need during retirement.
According to the Bureau of Labor Statistics, the average annual inflation rate in the United States averaged 3.24 percent from 1913 to 2011. Thus, you simply cannot save money under the mattress; it needs to be earning at least 3.25 percent per year to maintain its purchasing power. Rising health care costs associated with old age should also be factored in to how much you need to save for retirement. With so many uncertainties, you should always save more than you think you'll need. And you should plan for retirement early; the more time you have to plan for retirement, the less risk you'll have of not having enough savings for retirement.