How much do you need to retire?

Picturing yourself as a retiree may be hard if not impossible. But if you could envision those future years, you'd probably see a life full of activity and decades of health, happiness, and prosperity. No rocking chairs and lap shawls need apply.

Your retirement lifestyle is in your hands

The reality, however, is probably somewhere in between. The problem with the picture is that the pleasure and comfort of your later years depend, to an ever-increasing degree, on the action you take today.

Time can help you, due to the potential benefit of compounding. The other great benefit in preparing for retirement is tax deferral.

So many changing facets of the American workplace have made it more important than ever to take control of your financial future. By investing now with a long-term focus, you can greatly improve your chances of having a fulfilling retirement.

Americans used to count on a pension and Social Security to get them through those "golden years." These days, people change jobs more often, sometimes forgoing pension benefits. They may also rely on dual incomes and manage their own retirement funds through defined contribution plans. By most estimates, you'll generally need at least 70% of your final working years' income each year to maintain your lifestyle after retiring.

Sources of Retirement Income
pie chart source of retirement income
The above chart represents a breakdown of typical income sources for a current retiree. Source: ChartSource®,DST Systems Inc. Data is from Fast Facts & Figures About Social Security, published by the Social Security Administration, August 2016. Data is as of 2014. Copyright © 2017, DST Systems Inc. All rights reserved. Not responsible for any errors or omissions. (CS000123)

Start investing now

The accompanying pie chart shows the importance of saving now toward a retirement fund. Not only are Social Security benefits less significant, but the sums are diminishing and the age at which you can begin to receive benefits is higher. You can contact Social Security at (800) 772-1213 to learn what you can expect in benefits, and when. Benefits are calculated on your earnings, with certain variable factors.

An investment of $10,000 could grow to more than $100,000 after 30 years, at an annual hypothetical return of 8%, if all the returns were reinvested and the account grew tax-deferred.

Alas,  the responsibility for the bulk of your nest egg rests with you. Social Security represents approximately 33% of the total income received by retirees, and 36% of all retirees rely on Social Security for 90% or more of their income.*

*Source: Social Security Administration, 2016. Based on average annual benefit in 2013 (most recent report published) for all retired workers.

Beware: the high cost of healthcare and inflation

As you begin thinking about how much you'll need for a comfortable retirement, you may be startled to learn the impact of inflation. At an average annual inflation rate of 3%, your cost of living would double every 24 years.* Your annual income will need to increase each year, even during retirement, in order to keep up with the gradual rise in prices of everyday goods.

You'll also have to consider the likelihood of increased medical costs and health insurance as you grow older. The median nursing home cost, for instance, now runs more than $92,000 per year for a private room.**

**Sources: Genworth 2016 Cost of Care Survey, 2016.

The risk of relying on Social Security and your pension

Now that you have an idea how much you'll need to finance your retirement years – of which there can easily be 25 or more – you may better understand the importance of building your assets.

Many of us may need at least 70% of our annual pre-retirement income to live on each year after we retire. Of this, only about 55% comes from Social Security and qualified retirement plans, including pensions, for today's average retiree.* The rest must come from other sources, including personal investments, such as mutual funds and other investment products.

Traditional pensions are estimated to supply only 21% of retirement needs, according to the Social Security Administration.* Add that to the income you might expect from Social Security and you'll probably still fall far short of your goal. A reduced standard of living for a quarter century or more is hardly the stuff "golden age" dreams are made of.

Current tax deferral and time: two allies working for you

Time can help you, due to the potential benefit of compounding. The other great benefit in preparing for retirement is tax deferral. Using investment vehicles such as 401(k) plans or individual retirement accounts (IRAs), you can defer paying current taxes on your earnings until you are retired and potentially in a lower tax bracket. Meanwhile, depending on the type of retirement account and your current income, your contributions may be tax-deductible, helping reduce current tax bills. Keep in mind that withdrawals are taxed as ordinary income and those made prior to age 59 1/2 may be subject to an additional 10% federal penalty.

Example. An investment of $10,000 could grow to more than $100,000 after 30 years, at an annual hypothetical return of 8%, if all the returns were reinvested and the account grew tax-deferred. As with all hypothetical examples, individual investor results will vary. This example does not represent the performance of any specific investment, and the earnings would be subject to taxation upon withdrawal at then-current rates and subject to a 10% federal penalty for early withdrawal made prior to age 59½.

The more time you have until retirement, the more fortunate you may be. Delaying saving for just months – never mind years – can reduce your results.

Example. Jane begins investing $100 a month in her employer-sponsored 401(k) plan when she's 25. Mark does the same - beginning when he's 35. Assuming a hypothetical 9% annual rate of return compounded monthly, when Mark retires at 65, he'll have $183,074. Jane will have $468,132.

While this is only a hypothetical example and does not represent the performance of a specific investment, you can see the remarkable difference starting early can potentially make.

Invest early and often

By starting early and investing systematically you could potentially benefit from the potential of compounding and tax deferral.

Another advantage of today's retirement planning options is that you have some control over how your money is invested. Investment plans need to offer a variety of options because different people have different degrees of risk they will accept, as well as varying time frames they intend to hold their investments. A portfolio can be diversified to take these factors into account. It's a wise idea to consult a financial professional for complete information.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Investments are subject to market risk, will fluctuate and may lose value.

Diversification does not guarantee a profit or protect against loss in a declining market.

Please be advised that this document is not intended as legal or tax advice.  Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.  The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.

Equitable Financial Life Insurance Company (New York, NY) issues life insurance and annuity products. Securities offered through Equitable Advisors, LLC, member FINRASIPC. Equitable Financial Life Insurance Company and Equitable Advisors are affiliated and do not provide tax or legal advice.

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GE-90980 (02/2018)