If you’re nearing retirement age you’re probably asking, “How much savings do I need in order to retire?” This can be an overwhelming question and, unfortunately, there’s no magic, one-size-fits-all number.
Thankfully, there are several ways you can make an accurate calculation of how much is needed for retirement, which we’ll be walking you through in this post. Plus, we’ll cover some great investing tools you can use to help you save even faster.
How Much Is Needed for Retirement Today?
Setting an accurate goal for your retirement savings amount will give you a greater focus on what you’re working toward, and help you create a realistic game plan for getting there.
Let’s review some of the factors that will go into calculating your number.
- Retirement Age: At what age do you plan to retire? This will influence how many years of retirement you’ll need to save for. Check out the Abaris Life Expectancy Calculator.
- Income Sources: How much will you receive from Social Security? Does your employer provide a pension plan? Will you have income from real estate? Stocks? A savings account or CD? A part-time job?
- Health Care Expenses: These tend to be underestimated and increase over time. Medicare may only cover 50 to 60 percent of your healthcare costs.
- Education Expenses: Will you be paying for a child or grandchild’s education?
- Cost of Living: Will you still be paying a mortgage? Are you planning on downsizing before retirement? Or build your dream home?
- Travel Expenses: Are you itching to see the world? How many trips are you planning per year?
- Savings: How much do you already have saved for retirement? Do you have an IRA savings account
Will Your Spending Decrease… or Increase?
Studies have found that during the early years of retirement, spending does not decrease much, often due to increased travel plans or dream-house-building.
So depending on your expected expenses, you may really need to replace 70 percent-100 percent of your current spending budget. If you currently spend $60,000 per year, and you expect to live in retirement for 25 years, you will need to save between $1,050,000 and $1,500,000.
Now that you’ve thought through some broad strokes, get into more of the nitty-gritty details with a retirement planning calculator. Check out this calculator Nerd Wallet.
Your Savings Options
After running the numbers, you may be feeling a little overwhelmed about how much is needed for retirement. Fortunately, there are some great investment tools that will help you save for retirement much faster than simply depositing money in a savings account.
401(k): A retirement savings plan offered through your workplace.
Max contribution: $18,500/year; $24,500 for ages 50+
Pros: Tax-deferred – Contributions are taken from your paycheck before taxes. You won’t be taxed until you make withdrawals during retirement. Employer-matching – Employers can match your contributions (this is free money).
Cons: A steep 10 percent penalty for early withdrawals. Required Minimum Distributions (RMDs) begin at age 70 ½ (though deferring is possible if you still work for the sponsoring company).
IRA: An individual savings account you open through a bank, brokerage firm or mutual fund.
Max contribution: $5,500/year, $6,500 for ages 50+
Pros: Tax-deferred. Ideal if you’re in a higher tax bracket (>20 percent) and expect to be in a lower tax bracket upon retirement.
Cons: Penalty for early withdrawals before age 59 ½ unless you have a “qualifying reason.” RMDs must begin at age 70 ½.
Roth IRA: A modified version of a traditional IRA.
Pros: Not tax-deferred. Taxes are paid on contributions, and withdrawals are completely tax-free. Ideal if you’re in a lower tax bracket (<20 percent), and expect to be in a higher tax bracket upon retirement. Can withdraw your contributions at any time, penalty-free.
Cons: Cannot make penalty-free withdrawals until you’re over age 59 ½ and have had your account for 5+ years.
Which Savings Option Is Best For You?
First off, if your employer offers a 401(k) with matching, you should absolutely enroll. Not taking advantage of matching contributions equals leaving free money on the table.
When choosing between a traditional and Roth IRA, the deciding factor is whether you think you’ll be in a higher or lower tax bracket upon retirement. However, since this is impossible to perfectly predict, it’s a good idea to hedge your bets. If possible, spread out your tax burden by having both tax-deferred and non-tax-deferred accounts.
At the end of the day, no matter how much is needed for retirement, cultivating multiple income streams will be the smartest move. As they say, it’s always wise to put your eggs in more than one basket.
How much do you plan on saving for retirement? Have you opened an IRA or 401(k)? Tell us in the comments below!
Learn more about how to save at AAA.com/Financial.