Saving for retirement is one of the most important things you can do when it comes to financial planning. At top of mind for those saving for retirement, of course, is the question of how much you’ll actually need when you retire. For many American workers, a 401(k) plan is the vessel used to save for retirement. Figuring out how much you should have in your 401(k) at any point in your career — not to mention when you actually retire — can be challenging. You’ll have to take into account a number of things, including where you want to live, what you expect your lifestyle to be and when you plan you retire.
A 401(k) is a defined contribution retirement plan that many companies offer their employees. You put a portion of your paycheck into the plan, pretax, and invest it in various mutual funds and other investments. It earns money throughout your working life and when you retire you start to make withdrawals.
Some companies offer a 401(k) match as well. This means you get money from the company for free, based on how much you contribute. This is free money, so make sure yo take full advantage if your company offers it.
401(k) Savings and Retirement Location
Where you plan to spend your retirement will have a big impact on how much money you’ll need to save. A number of different factors fall under this bucket, each with its own impact on how much money you’ll actually need in retirement.
Cost of living is the most basic factor here. Retiring in Hawaii may seem like a tropical dream, but the cost of living in the islands is exceptionally high. If hitting the beach to surf in Oahu everyday is something you really want, you’ll have to make sure you have enough money in your 401(k) to cover the cost of living. Big cities like New York and Los Angeles will also have high costs of living. More remote places like Montana have much lower costs of living, though, so you’d need less in your coffers if you opted to settle there.
Another location-based factor to keep in mind is taxes. Each state has its own tax code, and some don’t have any income tax. Make sure to know the tax policy of the state where you are planning to retire so you have a sense of how much taxes will eat into your 401(k) savings.
401(k) Savings and Lifestyle
How do you want to live out your golden years? Retirement has evolved over time to become a more active time of life.It is now viewed as more of an end of the beginning of our lives rather than a beginning of our end. That shift in mindset has driven the need for additional sources of retirement income.
The Employee Benefit Research Institute study on the Expenditure Patterns of Older Americans shows that as we age our expenses decline. Using age 65 as a benchmark, the study found that household expenses drop by 19% by age of 75 and 34%t by age 85. The study also found that people over the age of 50 spend 40-45% of their budget on their home and home-related items. The bottom line is that by the time we retire our expenses are down between 20% and 40%. This is why expert opinions differ on how much of our pre-retirement income we need. Guidelines generally vary from 60 – 80%.
If you have a household income of $100,000 when you retire and you use the 80%income benchmark as your goal, you will need $80,000 a year to maintain your lifestyle. Assuming your 401(k) savings grow at 8%, you can expect to have $80,000 a year in interest income without having to touch your principal.
What if your household income at retirement is $200,000 and you only have $1 million stashed away? Are you really stuck with half of what you will need to retire comfortably?A study by a group within the National Institutes of Health (NIH) found that roughly 80% of seniors owned their own homes. Of those, roughly 55% owned them free and clear of debt. The majority of the remainder had very little mortgage and equity debt remaining.
401(k) Savings and Retirement Age
When you retire is the final big factor determining how much money you need in your 401(k). Though the average retirement age has shifted through the years, most people still retire some time in their 60s or 70s. Remember, though, that modern medicine means people are living longer. If you plan on being healthy until you are in your 90s, retiring at 65 means you need enough money in your retirement account to survive another 25 years in whatever lifestyle you choose.
You might not know exactly when you want to retire right now, but you should have a general idea. If you work a relatively low-stress job, you might want to work a few more years to make some more cash. This would also mean have fewer years where you are surviving off of retirement income. Just adjust your savings to match the general age at which you think you’ll retire.
The Bottom Line
It’s important to start saving early in order to plan for retirement. This includes contributing as much as you can to your 401(k). Employers can contribute up to $19,000 for their 401(k) plans in 2019. For 2020, the maximum contribution amount is $19,500. It’s always a good idea to contribute at least enough money to take advantage of your employer’s maximum matching contribution. When figuring out how much money you’ll need, consider all factors, including where you want to retire, your lifestyle and at what age you plan to retire.
Tips for Getting Retirement Ready
- Work with a financial advisor. According to industry experts, people who work with a financial advisor are twice as likely to be on track to meet their retirement goals. A matching tool like SmartAsset’s can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs, all vetted and free of disclosures. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
- Don’t forget about Social Security. You’ll get a check from the government each month, which can help you get to your desired retirement income level. Find out how much you’ll get with our free Social Security calculator.