Most people are looking forward to the peaceful years of being retired. Not having to work is a relaxing change, but first, you need to get yourself in a financial position to retire. But what do your finances need to look like? How much do you need saved for retirement?
Some Conventional Approaches
There are a few different approaches that experts take to retirement.
You Want 80% of Your Salary & Use the 4% Rule
One common rule of thumb is that you want your annual income during retirement to be 80 percent of your salary. This should theoretically be enough to be comfortable and not affect your lifestyle.
That suggestion combines with the 4 percent rule. That assumes you get an interest rate of 5 percent on your retirement nest egg. To use it, divide your desired retirement income (80 percent of your current salary) by 0.04 (4 percent). That is the amount that you need to retire comfortably and have that ideal income each year.
Another frequently suggested goal is $1 million. But this doesn’t account for variations in your lifestyle or goals.
12 x Your Salary
Yet another option is to save 12 times as much as your current pre-retirement salary. That would let you maintain your current lifestyle for at least 12 years. By spending less, such as 80 percent of your current salary per year, you could extend it further.
What to Expect From Your Retirement Savings per Year
The ultimate goal when you retire is to be able to live off the interest from your nest egg. Experts completed the following calculations, which assume:
- You retire at age 65.
- You live until age 91.
- You withdraw funds at a 4.09 percent rate of sustained spending.
Your annual retirement income if you have $300,000 in savings would be $12,270. It would increase to $40,900 for $1,000,000 and $61,350 for $1,500,000.
Consider Other Income Sources
As you figure out what you need saved for retirement, don’t forget to consider other sources of income. Examples include your pension and social security.