Setting the right retirement savings goals is important to achieving financial security in your later years. Unfortunately, far too many people don’t know how much money they need to live on after they leave the job market. And there’s a good reason for that — it can be complicated trying to estimate how much you’ll need decades into the future.
Fortunately, there are two simple, proven methods for estimating the size of your nest egg. Consider choosing one so you can set a savings goal that will ensure you are well taken care of in your later years.
1. Suppose you need 80% of your pre-retirement salary
When you retire, some of your expenses will likely drop. You won’t commute to work, and you may owe less to the IRS if some of your income isn’t taxable or if you drop into a lower tax bracket. You don’t have to save for your retirement either, since you’re already in it.
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That’s why many experts recommend that as a retiree, you should replace about 80% of your pre-retirement income. This is the amount you will earn just before you retire, so you will need to estimate what that will be when you are many years away from the workforce. You do this by adding 2% per year to your current salary from now until retirement. So if you’re making $50,000 this year, assume you’re making $51,000 next year and $52,020 the next, and so on. After you figure out what your final salary will be, assume that you need 80% of that amount to live comfortably as a senior.
You get Social Security benefits to provide some of this income, so you’ll want to factor that in when calculating how much money your retirement account should bring in. You can find out your estimated monthly Social Security benefit by logging into your mySocialSecurity account. If you figure out that you’re getting $19,000 in benefits and you estimate that you need $60,000 in retirement income, you can calculate that your nest egg should produce $41,000 a year.
Once you know how much income you need from your retirement accounts, you can easily estimate how big your nest egg needs to be to produce it. If you follow the general rule of 4% and withdraw 4% of your account balance in your first year of retirement before adjusting for inflation each year, you can simply multiply your desired income by 25. If you need the above $41,000, you would mean a saving of $1,025,000.
2. Plan to save 10 times your last paycheck
If all that math sounds too complicated, there’s an even easier way to determine your retirement savings goal. Assume you need 10 times your last paycheck.
Of course you still have to estimate how much your final salary will ultimately be before you leave the company. But once you do, it’s just a matter of simple multiplication. If you determined that your final paycheck was $75,000, you’d aim for a $750,000 nest egg.
Both approaches can help you make a reasonable estimate of the amount needed for retirement. Once you’ve done this math, you can use the calculators on Investor.gov to break down your big goal into a smaller monthly goal. Then make sure you contribute enough to a tax-advantaged retirement plan to end up with the money you need for a comfortable life as a retiree.
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