How Much Income Do You Need in Retirement?
You know you should be saving for retirement, but if you’ve ever wondered how much you should put away each month, you’ve come to the right place.
In this article, I’ll go over three common ways to save for retirement. Spoiler alert – the best way to save for retirement is to know how much you’ll need. The third method I present gives you the most realistic understanding of that figure, which means you can save the appropriate amount. But the other methods might work for you, too.
1. Spend 80% to 85% of Your Pre-Retirement Income
The first method to figure out how much you need to save for retirement is to plan to spend 80% to 85% of your current income (or what you spend now). So if you spend $3,000 a month now, you’d want $2,400 – $2,500 a month in retirement. The advantage of this is that it offers you a simple target to aim for when planning.
But this method falls flat if you have any unique circumstances. If you spend a significant chunk of your monthly income towards your mortgage but pay it off entirely by the time you retire, you might not need a full 85% of your current income.
However, you might see your expenses increase significantly if you have serious medical issues or need long-term care.
While it’s great to have a simple benchmark to figure out how much money you’ll need in retirement, think of this more as a jumping-off point than a hard and fast rule.
2. Save Based on Your Age
Another common guideline is to look at your age and save a multiple (or a percentage) of your salary. This way, each year, you gradually save a bit more of your income. This method also lets you easily check to see if you’re progressing at the rate experts recommend.
According to Fidelity, the savings benchmarks are:
- Two times your annual salary by age 40
- Four times your annual salary by age 50
- Six times your annual salary by age 60
- Eight times your annual salary by age 67
Using this calculation, you’d need to have saved the equivalent of your annual salary by the time you’re 30.4 years old.
To do that, you’d need to save 15% of your gross income starting at 25.
If you can stick to a strict savings schedule, this method can work for you. But if you can’t, this method is problematic because you’ll easily fall behind on these benchmarks.
This method doesn’t take fluctuations in your salary into account. Hopefully, you’ll see your salary rise over the years – but it’s hard to plan for that when you’re young.
In addition, these estimates don’t take into consideration your actual expenses, nor the amount you’ll pay in taxes even after retirement (yes, you still need to pay taxes after you retire).
Like we hinted earlier on, if you’re decades away from retirement, you’ll need to make predictions in terms of your earning potential. In other words, if you’re 30 years old and trying to figure out how much you need by the time you’re 65, you’ll have to calculate projections on what your income will be for the next 35 years.
3. Calculate Your Living Expenses
Given the potential inaccuracies of the percentage methods, a more realistic approach is to figure out your actual living expenses. In this method, the calculations are specific to your situation and allow you to adjust as you go. There are two main methods to figure out your actual expenses.
First, go back through your bank and credit card statements to analyze how much you’ve spent in the last few years (if you have a personal finance app, this should be a breeze).
Make sure you review at least a few years’ worth of expenses. Once you have that data, calculate your monthly average. This is your current monthly expenses.
The average number gives you a more realistic view of what you’ll need in retirement – it’s not too high or too low.
The second way to calculate your living expenses is to figure out how much of your expenses aren’t living expenses – in other words, how much are you spending on things like your 401(k), income taxes, or other non-retirement savings. The formula for this is simple:
Income – non-living expenses = how much money you’ve actually spent.
For this method, the longer of a period you use to calculate this number, the better.
Again, don’t forget to factor in life and income changes such as starting a family, annual bonuses and buying a house. There are also other expenses that should disappear: things like commuting to work, dining out with coworkers, or paying for your child’s college education. Plus, you can factor your Social Security income into your calculations.
Personal Capital Retirement Planner
No matter which method you use to determine how much income you need for retirement, it’s natural to have questions and concerns. And that’s where the Personal Capital retirement planner tool can help.
With the guidance of this tool, you have another way to calculate your expenses and better plan for your retirement—all based on your current and projected financial status.
There’s a lot to like about the Personal Capital free retirement planner, with these features among the most powerful:
1. Create a Spending Plan
Retirement won’t be nearly as enjoyable if you don’t have money to spend. With this data-driven feature, you can quickly calculate your monthly spending allowance.
With this in front of you, it’s easier to determine how much money you need to maintain your lifestyle in retirement.
2. Run Different Scenarios
Is it possible that you may retire early? How about a couple of years late? Do you have reason to believe you may fall short of your savings goals?
The Personal Capital retirement planner allows you to run and compare different scenarios, thus helping you better plan for the future. And of course, if you find a scenario that you like better, you can turn it into your new plan.
3. Add Income Changes
When your income changes, so will your retirement plans. Add income changes to account for things such as Social Security benefits, pensions, rental income, and/or inheritance.
4. Plan for Big Expenses
Just as your income may change in the future, the same holds true of your expenses—and some of these can be big. Use the Personal Capital retirement planner to plan for expenses such as a vacation home, your child’s college education, or traveling the world.
With the help of the Personal Capital retirement calculator and planner, there’s no need to worry about the future. You’ll have a firm grasp on your retirement goals and how to reach them.
You want to watch your retirement savings closely so that you’re able to set aside money according to how much you’ll need once you stop working. There will be times you will save less than desired — that’s ok, just make sure when you have extra money, you save it. Do the best you can and continually adjust your calculations based on what you think you’ll spend during retirement, adjusted for inflation. That way you can enjoy your golden years without worrying whether or not you’ll have enough money to pay the bills.
To track your retirement savings, check out Personal Capital’s free financial dashboard.