How Much Money Do I Need for Retirement?

Planning for retirement may be at the bottom of your to-do list, but the sooner it gets to the top, the more assets you will have available when the time for retiring arrives. It is safe to assume that you will need around the same level of income after you retire that you need now. Investing in bonds, stocks and cash investments while you are working is good, but you also need to think about the amount of income you will need when you stop working.

People Usually Underestimate the Need

It is very common for people to underestimate the amount they will need as they grow older. They don’t think about long-term home care or nursing home insurance. Medical costs could be your biggest expense in retirement, and they are going up year after year. You may not realize how long you have to live after retirement. Life expectancy is just a statistic. About 50 percent of people live longer than their life expectancy. Younger people will get the advantage of medical advancements and live longer. If you are beginning to plan for retirement, ask your plan sponsor, financial service provider or personal financial adviser if your plan is enough for the rest of your life.

How Much is Enough?

The most common rule is that you will need 70 percent of your working income each year after retiring. That may not be enough. Many people look to retirement for some well-earned fun. They may want to travel, start expensive hobbies or help their children or grandchildren. It is useful to consider that you will need the same income after retirement as you did when working. You may spend it on different things, but you will still want to spend. The more you can save while you are working, the better your retirement years will be. With 3 percent inflation, your retirement income may need to be more than your income today depending on how many years in the future your retirement is.

You can modify how much you need by changing your lifestyle. Buying an apartment or smaller home or living in a less expensive area can reduce the amount you pay out each month.

How to Figure it Out

The first thing you need to do is decide at what age you will begin to use your retirement savings or benefits. You may continue to do some form of work, but nothing like what you are doing now. One good calculation is to put 15 percent of your salary in savings or investment every year as long as you can. To have a basis on which to choose a retirement plan, you need to know the future value of what you have saved now and how much you plan to add to it each year until you stop working. Then you need to find a plan or investment that comes close to what you will need every year after retirement.

Retirement calculators can help you find the right amount you will need. They estimate inflation rate, 3 to 4 percent, annual return on your investments, 8 percent as well as the return you anticipate during your retirement years, 7 percent and possibly Social Security. Calculators usually give a big number that is your total savings goal. Some financial advisers will give you a monthly income number and, according you your present income, how to get there.

When you begin to plan for retirement you should not rely completely on Social Security benefits. They may cover about 40 percent of what you need, but you will need to save for the rest. The federal budget deficit has also introduced the possibility of some benefits being reduced and the introduction or alteration of means tests. It is most secure to be able to rely on your own resources. The government only being an added extra on top of what you have saved.

It is good to start saving in your twenties, but it is important to start even if it seems late. If you are investing, try to invest in lower risk investments as you grow older. Find out your net worth. Then use a retirement calculator. That will give you a fair idea of how close you are to the retirement you want.

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