How Much Do I Need To Retire? A beginners guide

Thinking about retirement can inspire images of lying on the beach, spending time with loved ones, and pursuing hobbies.

However, thinking about retirement can also produce anxiety.

Many people are uncertain that they’ll have enough savings to retire and meet their desired annual retirement income comfortably.

Like most people, you’re asking yourself, how much do I need to retire?

The answer to that question depends on your current age, pre-retirement income, and desired lifestyle. It also depends on what source of income you’ll have once you retire.

Some people have pensions, inheritances, or trust funds.

But most individuals rely on personal and workplace savings, Social Security, and even part-time employment.

This article breaks down some simple ideas you can use to determine how much you need to save.

how much do I need to retire
Photo by Aaron Burden on Unsplash

Factors Impacting Retirement Savings

Age is perhaps the biggest influence on how much you need to set aside for retirement.

That’s because the younger you are, the more you have time on your side. You also don’t have to have as much of your pre-retirement saved in your 20s as you do in your 40s.

A simple retirement savings formula from Fidelity suggests how much you should have saved by age.

  • By age 30, you should have one times the amount of your starting salary.
  • At age 35, that amount should increase to two times.
  • By age 40, you should have three times your starting salary.
  • At age 45, you should have four times saved.
  • By 50, that figure jumps to six times.
  • At 55, you should have seven times saved.
  • By 60, it jumps to eight times.
  • At 67, you’ll need 10 times your starting salary saved.

Let’s say your starting salary at age 25 is $50,000 a year. Here’s what you should have saved according to the above formula.

  • Age 30: $50,000
  • Age 35: $100,000
  • Age 40: $150,000
  • Age 45: $200,000
  • Age 50: $300,000
  • Age 55: $350,000
  • Age 60: $400,000
  • Age 67: $500,000

Other factors impacting your retirement savings contributions include your starting salary and desired lifestyle. If you plan to live well below your means in retirement, you won’t need to save as much.

How Much Should I Save Annually?

Many commentators estimate you’ll need about 80% of your pre-retirement income each year once you exit the workforce.

But the above assumes you will be doing no work and just relying on your pension savings. It also takes into little account your actual lifestyle and spending needs.

The first thing to do then would be to work out your pre-retirement annual income and then your annual lifestyle costs now and estimated in retirement.

If you start saving in your 20s, you should aim to save about 15% -20% of your annual income. This includes any employer matches for pension contributions and public pensions in a retirement savings account.

Saving 20% might well be an aspirational figure, but it at least gives you something to aim for.

But if you delay saving for retirement until your 30s or 40s, you may need to increase that annual amount.

Starting in your 50s, you will need to increase your savings even more and look for ways to boost your savings through tax-advantaged accounts where you can.  

You will also likey need to look to increase your annual income and income sources.

Dealing With The Unexpected

One of the problems with retirement plans is they’re just that – plans.

Anything can happen between your early 20s and retirement age.

Job losses, salary cuts, and emergency expenses are a few of those things.

It’s not uncommon for some people to have to dip into retirement savings before they actually retire to meet current needs.

As you progress through life, you’ll likely find you’ll need to make adjustments to your retirement savings goals

Your plan will also depend on your jobs’ benefits, including any pension, profit-sharing and your annual income.

Sources of Retirement Income

The most common sources of retirement income include the following:

  • Workplace pensions
  • Private pensions
  • Part-time income
  • Side hustles
  • Rental income
  • Social Security

Some retirees supplement savings and investment income with part-time employment.

However, many people who plan on working after age 70 end up being unable to work for numerous reasons. This can be due to physical limitations and local job market constraints.

For example, some employers may be willing to hire more older workers; however, the availability of work suited to the skills and abilities of elderly workers may not be a good match.

In addition, transportation may be limited or unavailable. Chronic illnesses and conditions that develop as people age can also limit the ability to work.

How Can I Maximize My Retirement Savings?

Besides starting as early as possible, you’ll want to choose investments that will protect you from inflation and have a long-term track record of increasing in value over time.

A well-diversified global index fund will help you achieve this.

Maximizing any employer contributions can be a great boost to your savings.

So, use this time to save the maximum you can. Prioritizing retirement savings over other financial goals during this time can also help.

For instance, saving more for retirement may make sense, than paying off your mortgage early may make more sense.

Final Thoughts: How much do I need to retire?

How much you need to save for retirement will depend on your age, when you plan to retire, your current income, and expected lifestyle needs.

However, a general rule of thumb is to save between 15% and 25% of your annual income toward retirement.

The sooner you start, the easier it will be to reach your goal. At the same time, you’ll want to choose investments that are going to pay the most interest without jeopardizing your money. When you’re younger, you have more time on your side.

This means you can take greater risks and invest more in stocks. You also don’t have to save as much of your annual income. The longer you wait to start, the more you need to save and the fewer risks you can take. 

FAQ: How Much Do I Need To Retire?
Can you retire on 200k?
Can you retire on 200k?

How can you create an additional retirement income?

There are a few different ways to create an additional retirement income. You can work part-time, start a side hustle, or rent out a property. You can also look into social security and other government benefits. However, savings and investments are the most common way to create an additional retirement income.

How can your work out your life expectancy?

You can do a few things to calculate your estimated life expectancy.
One way to calculate your life expectancy is by using an online life expectancy calculator. These calculators will ask you various questions about your age, health, lifestyle, and family history to estimate how long you’ll live.

Another way to estimate your life expectancy is by consulting with a doctor or other health professional. They will be able to take into account all of the factors that play into lifespan and give you a more accurate estimate.

Regardless of your chosen method, it’s important to remember that life expectancy estimates are just that – estimates. Your actual lifespan could be shorter or longer than the estimate, so it’s important to plan and save accordingly.

What is the average retirement age?

The average retirement age in the United States is currently around 65 years old. However, this number will likely increase in the coming years as more people live longer and healthier lives.

How do you create a retirement nest egg?

The best way to create a retirement nest egg is through saving and investing. You should start as early as possible and prioritize your retirement savings over other financial goals. Try to save between 15% and 25% of your annual income

Invest in a well-diversified global index fund to help increase the value of your investment over time. Alongside this, look for ways to boost your income and create income-generating assets.

What are some common mistakes people make when planning for retirement?

Some common mistakes people make when planning for retirement are not saving enough, not investing properly, and not revisiting their plan as they get closer to retirement age.

Not saving enough is a big mistake, as you will need a lot of money saved up to have a comfortable retirement. Not investing properly can also be a problem, as you want to make sure your money is working for you and not just sitting in a savings account.

Finally, not revisiting your plan as you get closer to retirement age can be a mistake, as things can change and you may need to adjust your plan accordingly. It’s important to stay flexible and be willing to make changes as needed.

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