Not sure how much to save? 4 quick questions to get you started
You know you need to save for retirement, but the question is “how much do you need to save?” As a general rule, some experts say you’ll need 70-80% of your pre-retirement income each year in retirement, while others recommend saving 10-12 times your current income. Because your situation is different from the next person’s, your number will also be unique. Not sure how to figure out the right number for you? Try answering these four, quick questions:
1. How long do you think your retirement will last?
If you plan on retiring at age 65, you may want to consider that, in the U.S.:
- Men live an average of 18 years past age 651
- Women live an average of 20.6 years past age 651
Another consideration is that your family’s longevity will likely impact yours too. Think about how long your parents or grandparents lived, consider your current health, estimate how long you expect to live in retirement, add a few extra years for good measure, and set that as the length of your retirement.
2. How much will things cost?
Even a low inflation rate will cause your purchasing power to dwindle over time. In fact, just a 2.05% inflation rate will reduce your purchasing power by about 50% in 20 years. 2 That means, you will need $150 to buy in 20 years what it costs you $100 to buy today. You’ll need to factor inflation into your savings plan to stay ahead of the curve.
3. How much will you spend?
Your next step is to try and nail down your retirement spending. It’s possible that you’ll be able to live on less money after you retire. For instance, your mortgage may be paid off, your children may be independent and out on their own, and you won’t have day-to-day work expenses. But some other expenses may be higher, like health care, for example. People in the 55-64 age group currently spend an average of $5,513 every year on health care, while those 65-74 spend $6,014 annually. 3 Make a list of your expected annual expenses, multiply them by the number of years you’ll be retired, and remember to consider inflation.
4. What other sources of income will you have?
In addition to the savings in your retirement plan account, you may be able to pull income from other sources when you retire. For example, you may get Social Security benefits, or have individual retirement accounts (IRAs), other personal savings, military or employer pensions, or your spouse’s retirement plan. Don’t forget to take these and any additional income sources into account when figuring how much you should plan to save.
Ready to nail down your retirement savings goal?
Use our retirement calculator to figure out exactly how much income you’ll have in retirement, based on your current situation. Then play around with the numbers to see how much you could have with a few quick changes to your contributions (if you’re a logged-in client, you have the ability to make these changes on the spot!). You can also use our benchmarking tool to see how you’re doing compared to others like you.
1 U.S. Department of Health and Human Services, National Vital Statistics Reports, Vol. 66, No. 4 (August 14, 2017
2 Source: https://www.vertex42.com/Calculators/inflation-calculator.html
3 U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, 2016
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