Setting the right retirement savings goals is important to achieving financial security in your later years. Unfortunately, far too many people haven’t figured out how much money they’ll need to live on after leaving the workforce. And there’s a good reason for that — it can be complicated to try to estimate the amount you’ll require decades in the future.
Fortunately, there are two simple tried-and-true methods of estimating how big your nest egg needs to be. Consider picking one of them so you can set a savings goal that will ensure you’re well provided for in your later years.
1. Assume you’ll need 80% of your pre-retirement salary
When you retire, some of your costs will likely go down. You won’t be commuting to work, and you may owe less to the IRS if some of your income isn’t taxable or if you drop down to a lower tax bracket. You also won’t have to save for retirement, since you’ll already be in it.
Because of that, many experts suggest you should replace around 80% of your pre-retirement income as a retiree. Now, this is the amount you will be earning right before retiring, so you’ll have to estimate what that will be if you are many years away from leaving the workforce. You can do that by adding 2% per year to your current salary from now until retirement. So if you are earning $50,000 this year, you’d assume you’d earn $51,000 next year and $52,020 the next year and so on. After figuring out what your final salary will be, assume you need 80% of that amount to live comfortably as a senior.
You will get Social Security benefits to provide some of this income, so you’ll want to take that into account when calculating how much money your retirement account must produce. You can find out your estimated monthly Social Security benefit by signing into your mySocialSecurity Account. If you find out that you’ll get $19,000 in benefits and you estimated you’d need $60,000 in retirement income, you can calculate that your nest egg must produce $41,000 per year.
Once you know how much income you’ll need from your retirement accounts, it’s easy to estimate how big your nest egg must be in order to produce it. If you follow the common 4% rule and withdraw 4% of your account balance in your first year of retirement before adjusting up each year for inflation, you can simply multiply your desired income amount by 25. If you need that $41,000 mentioned above, this would mean saving $1,025,000.
2. Plan to save 10 times your final salary
If all that math sounds too complicated, there’s an even simpler way to set your retirement savings goal. Just assume you’ll need 10 times your final salary.
Of course, you will still have to estimate how much your final salary will end up being before leaving the workforce. But once you do that, it’s just a matter of simple multiplication. If you determined that your final salary would be $75,000, you would aim for a nest egg of $750,000.
Both of these approaches can help you make a reasonable estimate of the amount required for retirement. Once you’ve done this math, you can use the calculators at Investor.gov to break your big goal down into a smaller monthly one. Then just make sure you’re contributing enough to to a tax-advantaged retirement plan to end up with the funds you need for a comfortable life as a retiree.
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