When it comes to retirement, there is no one size fits all approach.
For instance, some people have decided to join the Financial Independence, Retire Early (FIRE) Movement in order to retire early—sometimes in their 30s or 40s. In contrast, others continue working until their 60s or 70s before they retire.
According to the Social Security Administration (SSA), workers are eligible for full Social Security benefits between the ages of 65 and 67, depending on their birth year. And, at 65, Medicare benefits begin.
Most people cannot afford a comfortable retirement on Social Security alone, even if they delay their benefits. Why?
Most of the time, Social Security benefits are considered supplementary to investment income as well as retirement savings accounts, such as 401(k) and IRAs.
No matter when you retire, you should consider what time is the best from a financial standpoint. In other words, a retirement lifestyle that is financially viable is one that is financed by your Social Security payments, investments, and savings accounts combined.
How to Calculate the Amount You’ll Need in Retirement
When planning for retirement, it’s important to determine your retirement age and the amount of money you’ll need to save before you retire. American retirees have a variety of retirement savings options, including:- Employer-offered retirement plans, such as a 401(k)
- Social Security
- Savings and investments
- Other fixed sources such as pensions and annuities.
1. Let’s Talk About Social Security
Approximately 40 percent of a person’s income before retirement is replaced by Social Security. While the retirement program will probably not be enough on its own, it is undoubtedly important.It is important to know that Social Security benefits are calculated based on the 35 years in which you earned the most money. And, as already mentioned, as of July 2022, the average check is $1,544.70.
But, what about the maximum benefit at full retirement age? A few factors determine how much you could be entitled to receive from Social Security: how much you’ve earned over your working years, when you start receiving benefits, and how much your COLA increases are. If your COLA increases over time, your benefits will also increase.
- 62: $2,364
- 65: $2,993
- 66: $3,240
- 70: $4,194
What’s the earliest date you can collect your benefit checks? While the Social Security Administration (SSA) defines a full retirement age based on your birth year, technically, anyone over the age of 62 who is eligible can begin collecting benefits at any time.
2. Income-Based Calculation
According to many financial experts, a 70 to 85 percent replacement rate is recommended. A retirement goal could, for example, be to live on $35,000 to $42,500 annually if you make $50,000 a year.- Payroll taxes.
- When you retire, you should have paid off most of your debt.
- Retirement savings.
- The costs of everyday living, such as gas and clothing for the workplace.
If you’re at the beginning of your career or life journey, for instance, this rule of thumb may not be particularly helpful. In your later life, you may earn less or spend less than you earn today. When you are unsure of what your pre-retirement income will be, it can be difficult to estimate how much you will need for your senior years.
Furthermore, it is assumed that most of what you earn is spent. The method might not make sense for you if you are a saver by nature and spend much less than you earn every year. It might not work for you either if you rack up credit card debt and live above your means.
It may be necessary to increase your target to 100 percent of your current income if these expenses are in your future.
3. Spending-Based Calculation
Most people find that calculating retirement savings based on spending is a better method. Any person can benefit from this method—regardless of whether they are a spender or a saver.There is a good chance that you will spend a different amount when you retire than when you are working. For instance, you could pay off your mortgage before retirement to avoid having to make mortgage payments every month. It is possible that you no longer need to provide financial support for your children if they live on their own. Aside from that, you won’t have to pay for child care, commutes, or business attire related to your job.
- A costly vacation or other lifestyle purchase like a second home.
- Expensive health care.
- Gifts to family members such as college tuition.
- Inflation.
- Stock market volatility.
In your golden years, you may not want to deal with housekeeping chores such as shoveling snow, cleaning gutters, or raking leaves, which you may be struggling to do on your own as you age. Also, traveling and exploring hobbies during retirement can also be expensive for retirees.
4. Multiply Your Yearly Spending by 25
Okay. I might have thrown too much information at you. So, let’s circle back and focus on a quick calculation.Again, it’s generally agreed that you will need 70 to 85 percent of your pre-retirement income to maintain your standard of living after retirement. As a baseline, let’s use 80 percent. Using this example, multiply your current household income by 0.80. Then divide that result by 12 to estimate your monthly income needs after retirement.
For simplicity, keep this amount as is, or adjust it higher or lower to suit your retirement goals. It may be necessary to plan on additional income if, after retirement, you plan to travel or pursue an expensive hobby.
Next, subtract your anticipated Social Security benefit and pension income. The amount left is the income you will need to generate each month from your savings, so multiply by 12 to determine how much to withdraw from these retirement income sources annually.
As a general rule, retirees can withdraw 4 percent of their savings in their first year of retirement, and this amount can increase based on price increases after that. To be fair and balanced, though, there are issues with the 4 percent rule.
For one, there’s no guarantee the markets won’t have downturns. Additionally, your asset allocation might differ from the 60-40 rule.
“Another issue with the 4 percent rule is that your spending may change from year to year during retirement,” explains Kate Underwood in a previous Due article. “While some retirees may be able to maintain fairly steady spending rates, some years, you might face unexpected bills out of your control.”
In spite of its shortcomings, this rule can be a valuable tool for estimating retirement readiness.
Retirement Calculators
Not a fan of crunching your retirement numbers manually? I hear ya. Thankfully, there is no shortage of retirement calculators for you to use.- Your current age:Enter the age you are at the moment.
- Current retirement savings:Enter your current savings for retirement.
- Monthly amount invested:Specify how much you invest every month for retirement.
- Annual interest rate:This is what you expect your investments to earn each year.
- Amount at retirement:Choose the amount you wish to retire with.
- Rate of Return Before Retirement. Your retirement savings and investments will yield this rate of return annually.
- Rate of Return During Retirement. During retirement, you should expect to earn an annual rate of return on your savings and investments.
- Expected Income Increase. Percentage increase in household income you expect each year.
- Expected Rate of Inflation. This is what you would expect for long-term inflation.
- Married Checkbox.
- Social Security Checkbox. Make sure this box is checked if you are planning to take advantage of Social Security benefits during retirement.
The Bottom Line
Ultimately, you’ll be able to retire when your income streams, like Social Security, investments, and savings, can support your desired standard of living in retirement.At the same time, there is no one-size-fits-all solution. Retirees are often tempted to travel the world after they retire, but others are content to live a simple and frugal life after they retire.
A financial advisor can assess your current situation and suggest a savings and investment plan to help you achieve your retirement goals.
FAQs
1. What Is the Average Retirement Age?
The average retirement age in the United States is 63, but when you decide to retire depends on many factors:- Savings. Social Security retirement benefits average $1,544.70—as of this writing. However, for most people, this is not enough to cover living expenses. There is a severe shortage of retirement savings among most Americans. If you don’t have enough money for your nest egg, you may not be able to retire when you want—or you may not be able to pay your bills if you can’t work. As a result, many lower their standard of living once they stop earning a regular income.
- Lifestyle. The amount of money you need for retirement depends on your desired lifestyle. Traveling, for instance, will require you to have a larger retirement account balance than staying local and downsizing.
- Location. The higher your cost of living, the more money you need to retire comfortably. Your retirement years may be shortened if you relocate to a less expensive region.
- Health. You are able to work to a greater or lesser extent depending on your health. You may have to retire sooner if you suffer from chronic or debilitating health issues.
2. How Do You Determine Full Retirement Age?
The Social Security Administration provides a retirement age chart that can help you determine your full retirement age. If you cash in before your full retirement age, this chart will illustrate how much your retirement benefit will be reduced.3. How Will Your Account for the Unexpected in Retirement?
- What’s my contingency plan?
- How will I compensate for inflation?
4. How Will I Earn an Income in Retirement?
Retirees receive income primarily from four sources, according to the Social Security Administration:- Personal Savings and Investments
- Earned Income
- Company Pension Benefits
- Social Security Income