You already know that you need to save and invest for your own retirement. But it can be hard to know exactly how much to save. Knowing how much money you will need each year in retirement can be difficult, but there are some techniques you can use to more accurately predict your income needs in a post-work world.
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Per cent of Salary
When you are thinking about retirement income needs, a good starting point is to look at your current salary. Many retirement planners recommend that you shoot for 70 to 80 per cent of your pre-retirement income. This number is obviously subject to change, and there is no one right number for everyone. But since many expenses go down in retirement, you might need less money when you stop working than when you are going to work every day.
While the 70 to 80 per cent guideline is a good start, it might not be right for everyone. Look at your own planned retirement spending, since everyone will have different needs when they stop working. Some of your expenses, like commuting and the cost of a business wardrobe, will go away. But other costs, most notably the cost of an individual health insurance policy, may well go up. Developing a comprehensive retirement budget is the best way to ensure that you save enough for your post-work life.
The more outside sources of income you expect to have in retirement, the less you will need to generate on your own. Part of your retirement planning process needs to be assessing the sources of guaranteed income you expect to have, including any pension payments, annuity plans and, of course, Social Security. The Social Security Administration estimates that those benefits will replace approximately 40 per cent of a worker's pre-retirement income, so, depending on your needs, your own savings will need to provide between 30 and 40 per cent of your income.
When you withdraw money from your IRA or 401(k) program, use a conservative withdrawal rate to make your money last longer. Many financial planners and retirement experts recommend that new retirees withdraw no more than 4 to 5 per cent of their total retirement nest egg to provide income in that important first year. After that first year, retirees can increase the amount of the withdraw to account for inflation, but it may be necessary to adjust the withdrawal rate down a bit in years when your investments do not perform well.
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