Can I retire early? How will I know when I can retire? How much do I need to have in savings versus in an IRA? Will this be enough to live on? These are all questions I hear from clients when trying to find their ānumber,ā that financial goal they need to hit in order to have a comfortable and worry-free retirement.
Do you know your retirement number? While there are a few ways to calculate it, it really depends on your current (and future) budget and expenditures.
First, letās take a look at cost of living. According toĀ Bureau of Labor Statistics data, older households (defined as those headed by someone age 65-plus) spend an average of $49,542 annually. Broken down, thatās $4,128.50 per month. The top annual expenses were housing (at 33.6% of annual spending), transportation (15.2%), health care (13.4%) and food (12.8%). For health care, the majority of that cost went to health insurance, which can be especially prohibitive. The BLS calculated a year-over-year increase of 8% for health insurance, so expect that to continue its upward climb.
Now letās take that average annual expenditure of $49,542 and multiply it by the additional years you expect to live following full retirement age. If you are 65 at retirement and expect to live until age 95, and continue to spend the same amount annually, thatās $1,486,260 youāll need to have nestled away, or coming to you throughout your retirement. Donāt let that number scare you. Remember: It will be broken down over a 30-year period during which you will ideally have multiple sources of income (should you have planned well for retirement).
And while the average expenditure gives us great insight, does it really cover your current or future lifestyle? Will you want to travel more in retirement? Buy a new homeĀ or a second home?
This will be different for everyone, but here is a fast and easy rule for reaching your retirement number: Take your highest annual salary, and multiply that by 10-12. That will show you how much youāll want to have saved for a comfortable retirement. For example, if your best annual salary was $100,000, you will want to have anywhere from $1 million to $1.2 million saved to enjoy a worry-free retirement. Your financial advisor will be able to help you hone in on your retirement savings plan by breaking things down for you even further based on any investments you may have and the amount of risk you are taking with those investments.
To do some more at-home calculations, the Social Security Administration and Nerdwallet both have retirement calculators that can help paint a picture of your financial needs in retirement. Above and beyond the āmultiply by 10-12ā rule, these will take into account your current age, amount of money saved, current income, monthly savings, potential monthly spending, life expectancy and ideal retirement age to tell you how much you will ideally need to retire ā the right way.
Is your retirement number going to be above the average? If so, what will you need to make up the difference of this increased cost of living? And where will this money be coming from?
Odds are it wonāt just be from your bank account. Social Security is one of the few income sources that you can say is guaranteed for life, and that may account for up to half of your income in retirement. You may also have a pension, 401(k), IRA, personal savings and other miscellaneous income, like rental properties.Ā Note that with Social Security, every year you postpone filing (following full retirement age), you can stand to gain as much as 8% per year until you turn 70. Nowhere else will you find a guaranteed rate of return this high.
While the what-if scenarios can be endless, the above methods can give you an idea of yourĀ comfortable retirement savings range. That way, in a worst-case scenario, you can avoid having to go back to work in retirement, and in a best-case scenario, youāll be living on easy street.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.