Retirement is an exciting chapter in life but challenging financially. It’s that point where you’re not working or actively involved in income-generating activities, yet, you spend lots of money paying your bills, going on holidays or engaging in your favorite pastimes, which can be quite costly.

Proper financial planning is crucial during this phase of life. You need to get your finances in order and ensure you put away enough money for a comfortable and enjoyable retirement. So how much do you actually need to retire?

Below we’ll take a look at how much you need to save for retirement and how you can create a financial plan to achieve this goal.

How Much Do I Need To Retire? Guidelines to Consider

There’s no one-fit-all answer to this common question. The ideal retirement savings will depend on how much you’ll spend, how much you expect to earn on your savings, and how long you’ll live after retirement, which all rely on estimates.

When estimating your retirement expenditure you need to consider your annual expenses which should include housing, food, healthcare, utilities, and more.

Financial experts recommend several methods to help you estimate how much you need to retire. Some of these guidelines include;

The 4% Rule

This is one of the most used guidelines in retirement planning. The recommendation advises that one has the option to withdraw a maximum of 4% from their retirement funds annually, ensuring that their nest egg does not deplete too quickly.  Here’s a brief clarification of this concept:

• Starting Point: Start by adding up your retirement savings. The rule allows you to withdraw 4% of your retirement earnings in the first year.
• Inflation Adjustment: Adjust the withdrawal amount for inflation in future years. This is because living costs tend to rise over time.

According to the 4% Rule, your retirement savings should last at least 30 years. Historical market patterns inform this theory, which balances long-term savings and retirement income. It is of utmost importance to bear in mind that each individual’s circumstance is distinct and that the 4% Rule serves as merely a single strategy.

Its implementation may fluctuate depending on numerous aspects, including your retirement objectives, well-being, the condition of the market, and unexpected expenses. To formulate a tailor-made retirement scheme that considers your specific situation, it is recommended that you engage in a conversation with a financial advisor.

Retirement Savings by Age

Although there isn’t a set amount that everyone should have saved for retirement at a given age, financial advisors frequently offer broad recommendations based on a proportion of your yearly income. Remember that these are only approximations and that specific situations may differ. This is a general summary:

20s:

Save 10-15% of your annual earnings for retirement through employer-sponsored retirement plans like 401(k) plan.

By age 30:

Aim to save the equivalent, or double your annual income. If you started saving in your 20s, consider saving more as your salary rises.

By age 40:

At 40, you should try to save three times or more of your annual pay. Reassess your retirement goals and savings plan and modify your savings plan where necessary.

By Age 50:

At this point, strive to have four to five times your annual income in your target savings. Individuals above 50 are allowed to make “Catch-up” Contributions.

By age 60:

Aim to save eight times your annual pay. Consider your retirement date and minimize your investment risk as you approach retirement.

80% of Your Pre retirement Income

Retirement planners advise retirees to use 80% of their pre-retirement income in retirement based on the following assumptions:

Replacement Rate Target

According to the goal replacement rate, social security, retirement savings, pensions, and other sources should replace 80% of pre-retirement income.

Reasoning

The reasoning behind this suggestion arises from the notion that a multitude of your expenditures might diminish upon your retirement. To illustrate, it is plausible that your offspring shall have acquired financial autonomy, the burden of your mortgage shall have been alleviated, there will be no paying payroll taxes towards social security and the expenses relating to your occupation shall have abated.

Sources of Income

• Social Security: Your Social Security benefits may make up a percentage of your retirement income.
• Pensions: Your retirement income increases with a pension plan.
• Savings and Investments: Your savings, including 401(k)s and IRAs, will make up a large chunk.
• Additional Income: This may include home rental income, part-time job, and other sources

Adjustments

The 80% guideline is just a rule of thumb, and it could vary depending on individual circumstances, including lifestyle, health, and other factors. Consider your specific circumstances and create a retirement plan that meets your needs.

How to Calculate Retirement Savings

Calculating your retirement numbers can be quite tricky, given the many variables involved. But with these few factors to consider you might be able to calculate your retirement savings in no time:

• Retirement Age: The age you choose to retire determines how many years you need to save for retirement. If you work more years and save diligently you increase the chances of meeting your retirement saving target. On the other hand, early retirement makes it hard to achieve your target and you may end up getting fewer social security benefits than someone who waits longer before claiming.
• Annual Expenses: To ensure you’re getting correct annual expenditure estimates, consider how much on average, you’re going to spend on expenses like housing, food, healthcare, utilities and other retirement expenses per year.
• Adjust for Inflation: Once you get your yearly expenses, factor in the annual inflation, which is roughly 2-3% to enable you to maintain your purchasing power and live comfortably.
• Life Expectancy: Understanding how long you could live is vital for effective retirement planning. While you cannot accurately predict how long you’ll live, some online tools can help you make an informed guess of your life expectancy. An educated estimation will ensure you don’t run short of money to cover your needs during your golden years.
• Identify Income Sources: Several retirement income sources are available to you. Determine these potential incomes and find out how much they are going to give you. Some of these include social security benefits, pension plan payments, insurance benefits, annuity payments, equity mutual funds, bonds and fixed-income instruments.
• Retirement Lifestyle: The sort of retirement lifestyle you choose will heavily impact the amount of money you need to save for your retirement. A flashy lifestyle with lots of traveling and fun will definitely attract more expenses and, therefore, increased savings.
• Use a Retirement Calculator: Online tools make things easier when it comes to calculating retirement savings. They help you decide if you’re saving enough for your retirement. These calculators provide customized estimates based on the information you provide.

With so many variables involved in calculating retirement savings, you can easily get confused. Even online retirement calculators still get it wrong and should only be used as a first step when you want to have a rough idea of how much you should be saving for your retirement.

Consulting a specialist is the best way to plan for your retirement savings. A retirement plan specialist will discuss your financial situation and create a personalized plan that will cater to your individual needs.

Bonus – Income Gap Analysis!

One way to figure out how much extra money you might need to make in retirement to maintain your ideal level of life is to use the income gap analysis technique. It entails calculating the difference between your projected retirement expenses and income. To approach an Income Gap Analysis for retirement funds, follow these steps:

a. Calculate Your Retirement Expenses

Estimate your expected retirement spending first. Think about the prices of housing, healthcare, daily living, travel, and other luxuries. Take into account possible one-time expenditures like house remodeling or significant medical bills.

b. Identify Expected Income Sources

List other guaranteed retirement income sources like pensions, annuities, and social security. Consider IRA and other investment account withdrawals when computing retirement income, including 401(k)s.

c. Income Gap Calculation

To identify the income gap, subtract predicted retirement income from projected retirement expenses. Positive results indicate that you have more money than you need and that your revenue streams should support you. Negative results indicate a need for additional money to fund retirement expenses.

d. Consider Inflation

When planning your budget and expenses, remember to factor inflation into your calculations because prices rise over time.

e. Examine Your Options

If there is an income gap, think about several ways to close it. This could entail putting off some retirement targets, maximizing investment plans, boosting retirement contributions, or looking into taking up part-time employment while retired.

f. Regular Evaluation

Review your income gap analysis regularly, particularly as you get closer to retirement. Changes in financial objectives and life circumstances may necessitate modifying your plan.

Next Steps

Approaching saving for retirement the right way allows you to build a financial cushion to help you fund a fun-filled, comfortable retirement. And you need to start early. The sooner you start thinking and planning for retirement, the easier it becomes to save and the more money you’ll set aside for your retirement. So start now with these 4 easy steps for retirement planning.

1. Have a Retirement Savings Target

Your retirement savings target will act as your point of focus. Thankfully, creating one shouldn’t be a problem. You can use an online calculator to determine your target or talk to your planning specialist.

2. Assess your Current Savings

Evaluate your current savings and compare it to your target retirement savings. Note the difference and determine how much you need to step up your savings.

3. Bridge the Gap

Once you determine the difference between current savings and retirement target savings, you’ll need to cover the gap. Consider creating an action plan to increase your current savings. This may entail creating a budget to cut your expenditures and increase your savings, grow your income and make adjustments to your investment portfolio or you could still revise your retirement goals.

Example: Approaching retirement at 58, Emily assesses her situation. With $40,000 in expected income and $60,000 in expenses, she identifies a $20,000 gap. Emily optimizes investments and explores part-time work to bridge it.

4. Meet with a Retirement Plan Specialist

After you’ve understood your financial position, and have an action plan, it’s time to meet a retirement plan specialist.  A specialist will bring you closer to your retirement goals by discussing your plan of action and suggesting improvements. They will also help you set more realistic objectives and ensure you align with these objectives to attain your retirement target and secure your future.

At TCG, we provide financial and investment management services to help you achieve your retirement savings goals. Our specialists will discuss your situation and create a plan that aligns with your retirement goals.