Retirement is a life stage that many eagerly anticipate. However, proper planning is crucial to ensure a comfortable and worry-free lifestyle during this phase. How much money do you need to have zero troubles during retirement? Well, that’s kinda tricky, but there are some number that can guide you.
One of the most significant aspects to consider is the amount of money needed to sustain your chosen lifestyle in retirement. The general rule is that you’ll require between 70% and 80% of your pre-retirement income to stay comfortable. Now, how do you get there? Well, there are ways, but it requires a bit of discipline and some know-how.
The 70%-80% Retirement Rule You Must Follow
For instance, if your current salary is $100,000, you’ll need between $70,000 and $80,000 annually to live during retirement. Naturally, this figure may vary based on individual circumstances. If you own a mortgage-free home, your housing expenses will be lower.
Conversely, those with larger families may face increased costs in education and healthcare. So, you can imply so far that you have to get rid of your mortgage before retiring. The duration of your retirement is another important factor. If you expect to live until 90, you’ll need more funds to cover expenses throughout that period.
To get to that number, you better start now saving for your retirement. Initially, it’s prudent to focus on stashing away whatever you can and aiming for a specific percentage of your income. However, as time progresses, many individuals discover that setting a tangible goal, such as reaching a $1 million retirement fund, serves as a powerful motivator for consistent saving.
Having a precise target for retirement savings offers numerous advantages. It assists in determining the monthly contributions to be made to 401(k)s and other investment accounts, as well as in structuring investments to strike the right balance of risk in the decades leading up to retirement—avoiding both excess and insufficiency.
Some individuals opt to shape their retirement plans around a savings target rather than a predetermined date. Rather than working until a specific age, they continue working until they reach their financial milestone. This concept forms the basis of the Financial Independence Retire Early movement, commonly known as FIRE.
The Average Retirement Savings by Age Group
Based on the Federal Reserve’s 2022 Survey of Consumer Finances, these are the median saving future retirees has as of today, according to their age (Age and average retirement savings, respectively):
- Under 35: $49,130
- 35 to 44: $141,520
- 45 to 55: $313,220
- 55 to 64: $537,560
- 65 to 74: $609,230
- 75 or older: $462,410
In the age bracket of 35 to 44, the average saver has amassed savings amounting to $141,520. Moving to the next age group, 45 to 55, individuals in this category have, on average, more than double that sum, with $313,220 tucked away. As individuals age, their savings generally increase, peaking until around age 75, at which point the average balance begins to decline as retirees draw down their investments.
While these statistics serve as interesting benchmarks, they may not be the most reliable guide for setting your retirement savings target. Research suggests that most Americans should be aiming higher to secure a comfortable retirement. A 2023 Fidelity analysis involving over 3,500 savers revealed that approximately half of the respondents were not on track to meet their retirement needs. Across all age groups, the typical saver is only poised to have 78% of the necessary income to cover retirement expenses.
Who Should I Have 80% of My Preretirement Income When Retiring?
When retiring, financial experts often recommend aiming to have around 80% of your preretirement income. This percentage is a rule of thumb and serves as a general guideline. The idea is that by having 80% of your preretirement income in retirement, you can maintain a similar standard of living.
Several factors contribute to this recommendation:
- Reduced Expenses: In retirement, some expenses may decrease. For example, work-related costs, such as commuting and professional attire, may no longer be necessary. However, other expenses, such as healthcare, may increase.
- Social Security and Pension: Social Security benefits and any pension income can contribute a portion of your retirement income. The 80% target takes into account these additional income sources.
- Lifestyle Considerations: Your desired lifestyle in retirement plays a crucial role. If you plan to travel extensively or engage in expensive hobbies, you might need a higher percentage of your preretirement income.
- Inflation: Over time, the cost of living tends to rise due to inflation. Having 80% of your preretirement income helps account for potential increases in living expenses.