All of us dream of one day being able to retire - to finally be able to relax and enjoy the lifestyle we worked so hard for. However, you'll need a significant amount of money to do it, which is where a lot of Americans begin to worry.
Saving for retirement is a constant fear for many out there, especially during periods when the economy is hurting. The good news is that not everyone needs to save the same amount for retirement. By performing a few simple calculations now, you can help get yourself on the right path to financial success later on.
Calculating Your Retirement Needs: Breaking Things Down
First, you need to sit down and ask yourself several important questions that are specific to your situation. These include:
- How much money will you need to spend in retirement in order to maintain the lifestyle you see for yourself?
- Between now and retirement, how much money do you expect to earn from things like your savings and other potential income sources? How much do you plan on bringing in via Social Security?
- If you don't have enough money in your savings at that time, what are you going to do?
To answer the first question accurately, make a list of the two types of expenses: both essential and discretionary. Essential, as the term implies, are those things that you absolutely cannot live without. Things like food, shelter, health insurance, etc. Discretionary expenses are things like entertainment and travel.
One simple theory is that after you retire, you'll need between 75% and 80% of your current income to maintain the lifestyle you enjoy today. So if you made $90,000 per year right now, you would need to earn between $67,500 and $72,000 to continue on as you are as far as spending is concerned.
Another theory is that you should simply take what you are currently earning and subtract the amount of money that you are currently saving towards retirement to arrive at that ideal spending number. So if you're currently making that same $90,000 and you're saving $8,000 per year, you would need to make $72,000 to maintain your current lifestyle.
In this particular example, they happened to provide pretty similar estimates. But that won't always be the case, so try both formulas out and see which one makes the most sense for you and your goals.
Next, you'll want to help shed even more light on the subject by figuring out how much non-portfolio income you can expect to earn during your retirement years. For the sake of example, let's say that you want to earn $80,000 per year during retirement. If you can expect to receive about $20,000 per year from non-portfolio situations like Social Security, then you would need to make up $60,000 from elsewhere - meaning from your retirement portfolio.
So how does all of this relate back to the amount of money you should be saving right now? Many rely on what is referred to in the industry as the "25x Rule." It simply states that if you want to get $60,000 from your retirement portfolio every year, and you assume that you are going to live an estimated 25 years beyond retirement age, then that would mean that the value of your retirement portfolio needs to be $1.5 million or more.
If you've performed these calculations and realize that you aren't near your current goals yet, there are a few key steps you can take. First, it's never too late to start contributing more money to your 401(k). You could also invest in an IRA if you haven't already done so, contribute to a SEP-IRA (which is used by people who are self-employed), and more.
You also always have the option of simply working longer to help preserve your savings, but if you don't necessarily want to do that you don't have to. You might want to consider at least working until you're eligible for Medicare, as this can help cut down on your essential expenses because you wouldn't need private health insurance coverage.
In the end, saving for retirement is something that a lot of people worry about so if you're among them, rest easy knowing that there are many, many others. It can be a challenging process, but by following best practices like those outlined above you can help make sure you're on the right path. You should also consult with a financial professional to help come up with a specific plan that makes the most sense for you.