Human beings are living longer than ever before, which is great news. The only downside is that this means you will need more in your retirement fund to last you through the years.
If you are nearing the end of your working life, you may be wondering how you will know when you have enough money saved to retire. There are many factors, including your expenses and lifestyle, but there are some general considerations that will help you decide whether you have enough saved.
Determine Your Retirement Income
The first step is to determine how much you have saved already. If you have not kept a close eye on your retirement accounts, it is especially important to take stock of your savings. Financial planners say you can withdraw 4% to 4.5% of your retirement accounts each year without outliving your money.
Not only will you want to factor in your IRA, 401(k) and other investment accounts, you will want to visit the Social Security Administration’s website to see how much you can expect from them each month. While you can begin withdrawing Social Security benefits at 62, which is considered the early retirement age, your benefits will increase if you put off retirement until the full retirement age (67) or the late retirement age (70). The Social Security Administration estimates that your Social Security benefits will represent 34% of your retirement income.
If you will receive a pension from work, call your human resources representative and ask how much you will receive from this account each month.
Determine Your Retirement Expenses
After you have determined how much you can expect each month, it is time to figure out your expenses. To maintain your current standard of living, you will need 75% to 85% of your current pay during retirement. Thus, if you currently make $50,000 per year, you will need $37,500 to $42,500 during retirement.
Keep in mind, 75% to 85% of your current income will equate to a pretty austere retirement life. If you are still making mortgage payments or if you plan to spend your golden years traveling the globe, you will need to make much more.
It is imperative to put together a realistic picture of how much money you will need each month so you can ensure you have enough saved. Do not forget to factor in taxes. If you are withdrawing money from a 401(k), you will be taxed on this money.
Putting it All Together
You need to decide when you want to start drawing your social security and how much total income you wish to have each year during your retirement. Check with the Social Security Administration to see how much you will receive from them once you start drawing your Social Security. If you want to have an annual income of, say, $42,500 per year during your retirement years, and you find that $14,450 will come from your Social Security, then the other $28,050 will have to come from your retirement savings. If you take the recommended 4% from your savings each year, that means you will need a total of $701,250 in retirement savings.
After you have crunched the numbers, if your retirement income is greater than your projected retirement expenses—congratulations! You are ready to retire.
If your expenses are more than your retirement income, check to see if there are any expenses you can cut to make retirement possible. Perhaps you can sell your current home and purchase a smaller, less expensive home (or rent). In the example above, if you can live off of $37,500 per year instead of $42,500 (75% of your current income versus 85% of your current income), you would need to have $618,750 saved.