How Much Money Do You Need to Retire Comfortably?

Retirement planning is a long process. You spend years strategizing and prepping for your golden years. A number of investments, savings accounts, emergency funds, loans, and pension plans together make up for your retirement corpus. However, a common problem that most retirees face is not knowing how much to save. Estimations are not always accurate, and the cost of living varies every few years, leaving retirees with inadequate funds when they need it the most. While there is no fixed sum of money that can suit everyone’s needs, a general idea of how much to save can help you ensure a safe and comfortable retirement for yourself.

Here is how you can find out how much money you need to retire comfortably.

• Fix a specific amount
  There are different approaches that financial advisors recommend their clients to adopt in order to save sufficiently for their old age. Here are some of them:
  • $1 million is considered to be an ideal sum to sustain all your expenses in retirement. Although you can go up to $1.5 million or $2 million if you have the means, anything below $1 million could cause a cash crunch for you in the later years.
  • Saving up to 70 – 80% of your current or last drawn salary before retirement is another acceptable approach for retirement savings. In order to calculate this, you need to take into consideration your current yearly income and save up to 70 -80% of it for each year of retirement. For instance, if you earn $80,000 in a year, you would need at least $56,000 or a maximum of $64,000 every year after you retire.
• Try the 4% rule
  The 4% rule states that you should use no more than 4% of your retirement income in a year. If you withdraw more than this, you might run out of funds in the final years of your life. As a result of this, you could find yourself dependent on your family. Using the 4% rule, you can calculate back and determine the amount you would need in a year. This would differ for every individual. However, you would need to estimate how long you will live to be able to effectively arrive at a potent number. While this may seem like an impossible task, tracking your ancestors’ health, ages, and medical history can present you with more clarity. You must also look into your own health and consider factors such as how active you are and how many medical issues you have and then decide a probable age. It is also recommended to save a little more than what you actually require to cover unexpected expenses in times of emergencies.
• Decide the time to retire
  Retirement is no longer associated with the age of 65 years. With the Financial Independence Retire Early (FIRE) movement gaining momentum, many people are now retiring in their 40s and 50s. The age at which you retire has a lot to do with how much you need to save for your future. The longer your retirement, the more money you would need at hand. This will also imply that you need to start saving early in life and build a significant amount of savings that can last for a major portion of your life. However, if you retire late, you will need a comparatively smaller corpus as the years left in your life will also reduce.Moreover, every age comes with a specific set of expenses. In your 40s or 50s, you may be more occupied with renovating your house, travelling, etc. However, in your 60s and 70s, your health care expenses would take precedence. Take careful note of these aspects to ascertain a suitable figure for your golden years.
• Add social security benefits to the final sum
  Social security benefits can be of great help as you age. Therefore, you must factor this in while preparing for retirement. The withdrawal time is also crucial in this regard. If you delay your benefits until the age of 70 years, you can get an 8% increase in the overall amount. This is why it is essential to plan this in advance. Once you are clear about when you will need your Social Security benefits, you can add the estimated amount to your plan and decide on the remaining sum that you would need to save over and above these benefits.
• Check the returns from your investments
  The purpose of investments is to earn profits. Long term investments are largely targeted as retirement savings as the returns from such instruments are only profitable over the course of time. Keep a list of all your long-term accounts and funds to know how many of these will serve you as an income source in retirement. Consider your pension plans, annuity plans, bonds, equities, exchange traded funds (EFTs), etc. The returns from these investments are likely to fluctuate as time passes. Studying the past statistics of your investments will give you an idea of what the future holds. You can also consult a professional on this topic.
• Factor in inflation
  Inflation is perhaps the most crucial aspect of retirement planning. When you save, you need to understand that you are preparing yourself for the future. The cost of living is perpetually on the rise. Therefore, you must keep an eye on how much the inflation rate has risen in the past 10 to 20 years to know how much it is likely to rise in the next 10 to 30 years as well. For instance, as of September 2020, the annual inflation rate in the US was estimated at 1.4%. The figure for the previous year was 1.3%. You can use these numbers to form a graph and make a decision accordingly.
• Use a retirement calculator
  Retirement calculators are efficient tools that work on algorithms that take into account your income, age, lifestyle needs, inflation rate, etc. and give you an accurate number that will be able to sustain you and your family in retirement. These calculators can also help you find out when you should start saving, how long will it take for you to save, and whether or not your current savings are enough for your sustenance.

To sum it up

Ample retirement savings are your ticket to a dignified tomorrow. So, you must plan for it carefully. There is no rule that can fit or apply to all people. Factors such as your income, lifestyle, place of residence, tax liability, dependent family members, health conditions, and more, will dictate the amount that you need to save. However, following these basic principles can be of help when you calculate your wants and necessities.
You can also talk to a Financial Advisor if you need help in calculating a sum or finding out if you are on the right track to a financially stable future.