For some people, retirement cannot come soon enough. They long for an end to the daily grind of working. Others can’t imagine not working — they may dread the idea of not being active and engaged in their profession. Still others don’t see a definitive end to their work or business and may wonder, “what is retirement anyway?” If you are in any of these camps, read on. We will address how the answer can be different for each.
What will my income sources be in retirement?
The first step to answering the question of how many years until you can retire is to know what your income sources will be in retirement. Traditionally, workers could count on a pension that started at age 65 and lasted for the rest of their lives. These days, traditional pensions are rare, and most workers must rely on savings and Social Security as a source of dependable income.
The full retirement age for social security is age 67 for workers born in 1960 and later. You can start social security retirement benefits as early as age 62, but you will receive a substantially reduced benefit if you do.
For most people, Social Security benefits are not enough to live on in retirement, and so retirement income must come from other sources. Savings and retirement plans are the main source for most retirees, but other sources such as executive benefit plans, real estate, self-employment, or a part time job can also come into play.
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What will my spending be in retirement?
In order to know if your income sources will be sufficient to support you in retirement, you need to have an idea what supporting you will cost. However, it may be difficult to project what you will spend in retirement, especially if it is many years in the future. You may not know where you will live, what you will do, or what other things like vacations, hobbies, and spending time with family will cost.
To deal with this uncertainty, most retirement planners substitute a number based on current income or current spending needs. Estimates based on current income are called income replacement rates. Many retirement plans use a replacement of 75%, meaning that if your annual income is $100,000 now, your retirement spending is assumed to be $75,000 a year. The rationale behind using a replacement rate is that you’ll likely need less income in retirement than during your working years. Most people do spend less on retirement, and they no longer need to put part of their earnings into savings.
How much do I need to have saved?
In order for you to depend on your assets to provide income throughout our retirement, it is critical to have enough saved so that the withdrawals to take from your assets are sustainable. A well-known rule of thumb for sustainable withdrawals is the “4% rule.” The 4% rule suggests retirees can safely withdraw 4% of their savings during the year they retire and then increase that withdrawal amount for inflation each subsequent year for 30 years.
Using the 4% rule as a guide, you can estimate how much you would need to have saved in order to fund a certain amount of withdrawals. For example, if the amount you plan to withdraw is $40,000 per year (with increases for inflation each year), you need to have $1 Million saved (and invested in a mix of stocks and bonds) in order for those withdrawals to continue for 30 years.
What if I haven’t saved enough?
If you are behind on your savings, you can save more of your income or delay your retirement. Delaying will give you more time to build your savings and will shorten the length of retirement. A recent study by the National Bureau of Economic Research found that working 3 to 6 months longer has the same impact on retirement as saving an extra 1% of a salary over 30 years of working. By delaying retirement, you can also gain Social Security Delayed Retirement Credits, which can increase Social Security income by 25% or more.
Retirement Articles
In order to help you prepare for your future retirement, we've gathered a number of useful articles on a variety of subjects..
Another way to make up for insufficient savings is to downsize your lifestyle in retirement. How you choose to live in your retirement will directly affect how much money you need to have saved. For example, if the difference between living modestly in retirement and a more generous lifestyle is $20,000 a year, you can retire with $500,000 less by adhering to the more modest spending level. By contrast, if you want to afford to travel the world in retirement, you may need to step up your savings in order to achieve that goal.
Worried you haven’t saved enough? There are a few things you can do to catch up.
- Increase your savings while reducing spending.
- Maximize your company’s full match in your retirement plan.
- If you are 50 or older, you can use “catch-up” contributions in your retirement plan or your IRA. In 2024, the contribution cut-off is an additional $7,500 to your 401(k) plan each year, and an extra $1,000 across Traditional and Roth IRAs combined.
Most importantly, you need to have a goal for how much you will have saved by retirement. Personal savings goals are different for each person, depending on their unique circumstances. But by ensuring your finances are invested and saved by each age milestone, you can foster peace of mind, knowing that your golden years will be secure and comfortable.
Maintaining your lifestyle
A savings goal may not encompass the entirety of financial planning, but it is a quick way to assess whether you are on track. More importantly, it can inspire you to take concrete steps and begin saving more.
Blankinship & Foster financial planning services in San Diego, are fee-only family wealth advisors, we take pride in providing thoughtful financial analysis, planning and investment advice to all our clients. Whether it’s keeping your house, or joining a retirement community, our goal is to support how you want to live and plan for your retirement.
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