Today I’ll talk about how you can set yourself up for a comfortable retirement by breaking down how much money you should need at each age.
You’ll most likely start looking into how much monthly income it’ll take you to retire comfortably by asking yourself how much do I need to retire?
This answer depends on the lifestyle you want to carry as well as your income production right now. As I talked about in an earlier article, some people can retire on $500,000 while others have no chance at that due to circumstances and expensive lifestyles they want to maintain through retirement.
It’s of extreme importance that you know some key principles of investing in order to start calculating what level of retirement income you’ll need to be comfortable, so let’s get into those principles now.
Saving Money vs. Investing Money
There is a huge difference between hoarding money and investing money. When you save money in a savings account the return will be very minimal. In comparison, putting money into a retirement account like an IRA or 401k, a brokerage account, or HSA (health savings account), you’ll earn greater returns.
It’s also highly important that you increase your contribution level as you age. Many people forget this mistake and rely on their early retirement investments to grow substantially by the time they are ready to fully retire.
How Much Money Do You Need to Retire?
It’s recommended by experts that you should have an income that is about 80% of your pre-retirement salary. To provide an example, if you earn $200,000 annually, you’ll need to earn roughly $160,000 yearly from your retirement income in order to maintain the same lifestyle.
There are some caveats, however. You can adjust this number to account for outside income sources such as pensions, social security, part time jobs or side hustles, as well as items such as your medical bills or in some cases, a desire to spend more money during retirement. In my case, I intend on traveling often so I like to always round up when thinking of retirement income needs.
Retirement Savings: The 4% Rule
There’s an article on Investopedia that addresses the 4% rule.
In summary, the article outlines a scenario where someone is sitting on a pile of retirement savings. To continue on with the example above, if you have a $200,000 annual salary and are looking to have about $160,000 in retirement income, you’ll need $4,000,000 in the bank to accomplish this. The strategy goes on to explain how it assumes that a 5% return on investments (taking into consideration taxes and inflation) and without adding any additional income to the equation such as Social Security Benefits, as well as maintaining the same lifestyle pre-retirement.
When Should You Retire?
Now that you are armed with all of the necessary information you need in order to make informed decisions on retirement, visit our retirement age calculator that breaks down scenarios of when and how you can retire based on your age, income, expenses, and desired lifestyle.
About Edwin Cannon
Edwin Cannon has spent his entire career in the financial industry and specializes in alternative investments and surviving marketing turbulence. He started My Retirement Paycheck to help educate consumers about retirement investment options that aren't typically introduced by advisors.