How much money will you need for retirement

Financial experts recommend several retirement saving strategies. Since each recommendation has pros and cons, it’s a good idea to examine them carefully. Let’s take a look at three common guidelines.

Percentage Of Your Salary

Some experts recommend that you save at least 70 – 80% of your preretirement income. This means if you earned $100,000 year before retiring, you should plan on spending $70,000 – $80,000 a year in retirement.

A benefit of this strategy is that it’s easy to calculate. And you can use the result to estimate how much you need to save for retirement. For instance, if your current income is $50,000 and you expect your retirement to last at least 30 years, you’ll need roughly $1.5 million for your nest egg ($50,000 x 30).

However, a major downside of this guideline is that it doesn’t consider inflation. You won’t know how much you’ll need to retire unless you look at your current salary and adjust it for inflation. You can use an inflation calculator (search for “forward flat rate”), which can be the simplest option, or you can use the rule of 72.

If you take 72 and divide it by the average inflation rate, you’ll get the number of years it takes to double your cost of living. For example, using a 3% inflation rate, it’ll take 24 years for it to double. While this is a good rule of thumb, the more accurate way is to use an inflation calculator.

Another downside is that it’s hard to determine how much money you’ll need because it’s hard to predict how long your retirement will last. That said, you can still use it as a guideline to start setting aside a percentage of your income into retirement and savings accounts.

The 4% Rule

The 4% rule refers to the withdrawal rate you should make from your retirement assets so that your money can last at least 30 years. If you decide to follow this guideline, you’ll make a 4% withdrawal from your funds the first year. And you’d adjust your withdrawal rate for inflation in the following years.

For instance, say you plan on living on $40,000 a year during retirement. If you follow the 4% rule, you’d need $1,000,000 to retire, or 25 times your annual expenses. Once you reached that goal, you’d withdraw $40,000 a year the first year.

And if inflation was 4% in year one, you’d withdraw $41,600 the second year ($40,000 X 0.04) +$40,000 = $41,600)

You may have seen this percentage floating around, especially among members of the FIRE movement (Financial Independence, Retire Early). That’s because one of the biggest fears (and risks) for retirees is having their funds run out. Though there’s no guarantee you’ll live to be 100, it’s better to be safe than sorry.

Although the 4% rule is easy to follow, it has some disadvantages. For example, withdrawing 4% each year might cause you to run out of money faster if you don’t have enough saved. In addition, the rule doesn’t account for market fluctuations.

Some experts believe that spending more when the economy is doing well and spending less when it isn’t can help your retirement portfolio survive longer. This is sometimes referred to as dynamic spending.

Multiples Of Your Annual Income

Fidelity recommends saving a certain percentage of your salary based on your age and income. It recommends this strategy because your age has a huge impact on the amount you need to save for retirement.

You start off at a smaller percentage when you’re younger so by the time you reach retirement age, compound interest will have done its work, helping you achieve a comfortable retirement.

The brokerage suggests you start by saving at least 15% of your gross salary when you’re 25 and investing heavily in more aggressive assets like stocks. By the time you’re 30, you should have saved at least 50% of your salary. Of course, you could be more aggressive with your 401(k) savings goals.

Retirement Goals By Age

Here’s a table that shows an estimate of how much of your annual income you should budget for retirement by age.

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