How Much Money Do I Need To Retire?

April 2, 2022

Retirement is the process of withdrawing from one's job, career, or active working life. There are many benefits to retiring, including more time for relaxation and travel, increased opportunities to spend time with family and friends, and the ability to pursue new hobbies or interests. Retirement can also be a time of exploration and self-discovery, as you have more time to focus on your own needs and desires. If you want to go on a spontaneous trip and drive cross country, you can. If you worked in finance for years, but your true passion was to be a preschool teacher whose earnings were a 1/5 of your salary, you can now embrace this new adventure. If your daydream was to wake up and have two hours to work out at the gym and then enjoy a late home cooked breakfast every day, the time is now! You own your own time and can schedule life accordingly. The only caveat is that you need enough money to focus on yourself instead of on work. It can happen at any age but is most often associated with reaching a certain age, such as 65. It can also be voluntary or involuntary. Involuntary retirement may be the result of downsizing, layoffs, or other work-related reasons. Regardless of how you transitioned into retirement, you will definitely want to be prepared to enjoy life to your best potential. To do this, you will need to make sure you have the funds available to support the life you always imagined yourself living.

How much money do I need to retire?

There is no one definitive answer to this question. It depends on a variety of factors, including how much money you have saved, how much income you will continue to receive during retirement, where you live, and what your monthly expenditures are. Generally speaking, you will need about70-80% of your pre-retirement income to maintain your standard of living in retirement. If you earned $100,000 per year at your job, you now need approximately $70,000 to $80,000 per year to have the same quality of life.  

What is the benefit of having a 401K or 403B?

A 401K or 403B is a retirement savings plan that is sponsored by an employer. Employees can choose to have a portion of their paycheck withheld and deposited into the account. The money in the account grows tax-deferred, meaning that employees do not pay taxes on it until they withdraw the funds during retirement. The company typically vests the employee after being employed for a certain time frame resulting in the employer allocating funds to the employees retirement account. It is commonly recommended that you should save 20% of your income every month. A popular and accepted guide that you could follow is the 50/30/20 rule meaning that you should reserve 50% of your budget for monthly bills and expected expenses like rent, food, and required expenses. 30% of your income would be reserved for discretionary spending. The last 20% would go towards savings (your employer match in your retirement savings can be included to reach this goal). Remember, if you are unable to meet the 20% goal, any money you are able to contribute to savings is better than not saving.

 

What is the 4% rule?

A principle that you may have heard about is the 4% rule. Basically, you withdraw 4% of your funds the first year. Every year thereafter, you withdraw 4% of your funds plus give yourself a cost of living raise factoring in the inflation rate. By doing this, it speculates that your money will last for 30 years while accounting for a changing economic environment. It was designed based off of a portfolio with 50% invested in bonds and 50% in stocks. Consider that your portfolio may be different than this. Remember, there is no value when invested in the stock market as there have been crashes over time. It must also be considered that you may incur expenses for unforeseen circumstances or see changes in return on investments over time. The 4% rule is only an estimate to help you to plan for success in retirement. Many other factors play into the decision-making process to determine if you are ready to retire.

 

What other equation can I use?

Another simple equation you can use to estimate if you have enough money to retire is take your total savings plus investment return rate against your annual expenses.  Let’s emphasize it is only an estimate. Your investment return rate will fluctuate with market conditions.  This equation gives you a look at the big picture.

What if I have a pension?

A pension is a type of retirement income that is paid to employees who have retired from their job. Pensions are typically funded by the employer and may be in the form of a fixed monthly payment or a percentage of the employee's former salary. They are a form of "defined benefit" retirement plan. The pension will provide a steady stream of income when the employee retires.

What is an annuity?

Annuities are a way to protect your retirement finances. They provide an income stream for life, so you never need worry about out living the money in this account! Annuity rates have been on steady decline over recent years due largely because these products were previously only available from insurance companies - now retailers like American Express also offer them as well (though they come with higher fees). You don't even need good credit; just put down some monthly premiums or contribute frontline cash at any time without interest charges.

How will social security contribute to my retirement?

Social Security is a federal program that provides benefits to retirees, disabled workers, and the families of deceased workers. Benefits are paid out of payroll taxes collected from workers and employers. Social Security is the largest source of retirement income for Americans. To be eligible for Social Security benefits, workers must have a certain amount of "credits" based on their work history. Workers earn one credit foreach $1,510 of wages or self-employment income. Most people need 40 credits (10years of work) to qualify. To access your social security, you will need to provide proof of your age and identity. You can do this by presenting a valid driver's license, passport, or other government-issued ID. You will also need to provide your Social Security number. Once you have all of the required documentation, you can apply for benefits online. Social Security payments are based on a variety of factors, including your income and work history. The average monthly payment is about $1,657 with a maximum benefit of $3345 as of January 2022. However, it is important to remember that Social Security is not intended to be the sole source of retirement income.

 

It is never too early to start planning for retirement. The sooner you begin saving, the more time your money has to grow. It is important to factor in all of the different sources of income and make a plan that will ensure a comfortable retirement. Retirement may seem like a long way off, but it is important to remember that to achieve this milestone, you must be prepared! It is time to reap the rewards of your hard work like enjoying more time for leisure activities, having increased freedom and flexibility, greater opportunities for travel and exploration, and enhanced quality of life. In addition, you can enjoy a sense of accomplishment and satisfaction from having completed a successful career.