Planning your retirement will take years of your life, and the process is filled with uncertainties and questions about the future. One of the fundamental queries is, “How much money do you need to retire comfortably?” Fidelity, a renowned financial institution, has dug into this question and formulated four key guidelines that can serve as pillars for your retirement planning strategy.
As you embark on your retirement journey, it is important to reckon working alongside a seasoned financial advisor. Their expertise can provide invaluable insights tailored to your unique financial situation and aspirations. “The age at which you choose to stop working can have a big impact on how much income you need from your own savings,” emphasizes Fidelity. This decision ripples through other critical retirement considerations, including savings rate, savings factors, and sustainable withdrawal rates.
Retirement Guidelines: How Much Money Can You Take From Your Savings?
To construct these guidelines, Fidelity conducted a comprehensive analysis, encompassing yearly savings rates, savings factors, income replacement rates, and potentially sustainable withdrawal rates. The interconnectivity of these factors underscores the importance of holistic planning.
Fidelity’s researchers operated under specific assumptions, including no pension income, continuous employment with no layoffs, uniform wage growth, and proportional contribution increments with wage growth. The guidelines underwent rigorous stress testing to ensure efficacy across a spectrum of market conditions and investment mixes, succeeding in nine out of 10 scenarios.
How Much Money Do I Need For a Good Retirement?
This is a tricky question, and depends on every individual. It depends on various factors, including your current lifestyle, expected expenses in retirement, and the age at which you plan to retire. However, there are some general guidelines that can help you estimate the amount of money you may need.
Financial experts often suggest the “80% rule,” which recommends aiming to replace 80% of your pre-retirement income to maintain a similar standard of living. This assumes that some expenses, such as commuting and work-related costs, will decrease in retirement. To calculate this, start by identifying your current annual expenses and then estimate how they might change in retirement.
Consider your housing situation, healthcare costs, and potential travel or leisure activities. Additionally, factor in inflation, as the cost of living tends to rise over time. Social Security benefits and any other pensions or income sources should be taken into account when calculating the gap that needs to be filled by your retirement savings.
Here’s an example so you can take as a guidance, with an imaginary guy we’ll call Chuck:
- Chuck is planning to retire at 66 years old, he was born in 1988
- His annual income is $75,500 a year.
- He saves $377 a month for retirement.
- The annual retirement expenses are expected to be $49,000.
When he’s ready for retirement, he’ll have $429,864, but he’ll actually need $909,784. To achieve that number, Chuck needs to save $901 monthly. Of course, it could impact your retirement saving if you have been taking money for the funds. As I told you, always talk to an expert in retirement savings that will guide you through the whole process.