| If you retire at age || |
You will need retirement savings of:
You will have $0.
|We place the money you indicate as your monthly savings into the retirement accounts where it would provide you with the greatest overall benefit. Below, we show you average figures of where your retirement income will come from.|
|Cash Savings and Investments||/year|
|Projected Post-Tax Annual Income||/year|
- About This Answer...read more
To figure out how much you need to save for retirement we first calculate how much money we expect you will spend over the course of your retirement. This means looking at the income you will need based on your lifestyle preference, then factoring in the number of years in your retirement (we assume you live to 95).
Once we have a good idea of your total need in retirement we use our models to analyze your existing resources. This means estimating your retirement income from Social Security and the impact of current savings plans, pensions and other retirement accounts. In our analysis we include the tax impact of these items so we do not overestimate your retirement income.
We then do some fancy math to calculate the savings you will need to have built at the time of retirement, based on your needs and resources, to sustain your desired lifestyle.
- Our Assumptions...read more
Lifespan: We assume you will live to 95. We stop the analysis there, regardless of your spouse's age.
Retirement accounts: We automatically distribute your savings optimally among different retirement accounts. We assume that the contribution limits for your retirement accounts increase with inflation.
Taxes: We calculate taxes on a federal, state and local level. The tax implications of different tax-advantaged retirement accounts, Social Security income and other sources of retirement income are all considered in our models. To better align with filing season, tax calculations are based on the tax filing calendar, therefore calculations prior to April are based on the previous years tax rules.
Social Security: We estimate your Social Security income, using your stated annual income and assuming you have worked and paid Social Security taxes for 35 years prior to retirement. Our estimate is sensitive to penalties for early retirement and credits for delaying claiming Social Security benefits.
Return on savings: We assume the return on savings is the same percentage across different savings instruments.
- Our Retirement Expert
Jim Barnash, CFP Retirement
Jim Barnash is a Certified Financial Planner with more than four decades of experience. SmartAsset’s retirement expert is passionate about helping both individuals and business owners prepare for retirement. Jim has run his own advisory firm, worked for large financial services companies and even acted as a consultant to help other advisors grow their businesses. He is an author and public speaker on a variety of financial topics. Jim previously served for six years as President and Chairman for the Financial Planning Association. He also instructs others about the topic – Jim has created and taught courses on financial planning at DePaul University and William Rainey Harper Community College.
For a working person, the golden years of retirement can be both easy and difficult to imagine. We may fantasize about international adventures or beachside escapes, but rarely do we lay the groundwork for realizing our retirement dreams financially. There are, after all, more immediate concerns: Job, kids, mortgage payments and car payments, among other costs. Amid this daily grind, it’s easy to put retirement savings on the back burner, especially when it’s 15, 20 or 30 years off. Indeed, surveys have repeatedly shown that the average American retirement savings is too low and that significant numbers of Americans in their 30s, 40s and even 50s have no retirement savings at all.
Needless to say, the save-nothing approach is not recommended. At its best, retirement is a time when the stresses of years one through 65 (or so) fade, leaving room for relaxation, delectation and grandchildren. If money is scarce, however, financial anxiety could crowd these pleasures out. Want to know how to retire comfortably? Start saving.
On the other hand, just as it’s unwise to save nothing at all, it’s unrealistic to try and save every penny that isn’t already dedicated to paying bills or buying groceries. For most retirees, there are other sources of retirement income besides savings, Social Security being chief among them. The common assumption is that some savings, in addition to Social Security and a less expensive lifestyle (no more kids in the house, no more commuting costs) will all add up to financial security in our sunset years. To put it another way: It’s common to assume that if we save in good faith, things will work themselves out. For some, that may turn out to be true, but such success stories are more a result of good luck than a sound retirement strategy.
That phrase - sound retirement strategy - is where many of us lose interest. It is loaded with negative connotations: Expensive investment advisors, large stacks of documents and complex spreadsheets, to name a few. But a sound retirement savings plan doesn’t have to be complicated. It can be boiled down to one simple question: How much do I need to save to retire? By putting away a percentage of your income every month from now until you retire, you can do away with the financial anxieties far too many seniors find themselves facing. A retirement calculator can help.
How Much Do I Need to Retire?
To figure out exactly what it will take to retire in comfort, it’s important to consider what kind of lifestyle you expect to lead in retirement. Do you hope to travel? To Paris, or someplace a little cheaper? How often do you want to eat out? Go to the movies? The beach? Do you want to move closer to the beach? The grandchildren? These questions may seem trivial now, but they can help give you an idea about the income you’ll need in the future. If you’re set on seeing the Eiffel tower, the Pyramids at Giza and the Taj Mahal, you’re going to need a sizable nest egg to draw upon. On the other hand, if you expect to live a rather low-key lifestyle, with far fewer expenses than you currently have, you won’t need to save quite as much.
When considering your retirement lifestyle, a common guideline is to replace 70% of your annual income before your retirement. You can plan to do this through a combination of retirement income sources that include Social Security, investments and savings from 401(k)s, IRAs and other retirement savings accounts. You must also consider essential factors like inflation, which will increase the cost of prices over time and decrease how much you can buy with your money.
The important thing is to build a retirement plan that is realistic. Don’t shortchange your future self by assuming that you can live off of canned tuna and scrambled eggs. Independently from inflation, some costs will likely go down in retirement, but others may go up. Specifically, healthcare costs are likely to rise in retirement. So it’s best to have a cushion for unpredictable costs like that. Plus, retirement is your reward for decades of hard work: Treat yourself accordingly.
Saving for Retirement: Where Are You Now?
Whether you plan to live lavishly or frugally, you’ll need to have a certain amount of money saved by the time you retire. Think of this figure as a mountain summit, reachable by several different paths. If you’ve done everything right so far, that summit is still in plain view; you’ve followed the most direct and least difficult path, and all you need to do is continue on in the same direction. If, however, your savings aren’t where they should be, it’s as if you’ve wandered in the wrong direction—you’ll need to recalibrate and start climbing in order to reach the summit.
To determine your current financial coordinates, you need to answer three questions:
- How much have I saved thus far?
- How many years until I retire?
- What’s my annual income (and how much of that do I want to replace)?
The answers to those questions will determine how much work you have to do to reach that mountaintop. If you’ve saved plenty and you’re still young, great—you’re well on your way. If you’ve saved nothing and your 60s are just around the corner, not so much. Let’s check out some examples using our retirement calculator to see how this works in reality.
Let’s begin with a best case scenario: You’re 25, and you’ve only been working a few years before you decide to get smart about your retirement. You live in a mid-sized city, let’s say Tulsa, Oklahoma, where you earn $50,000 per year. You currently have $5,000 in your savings account, and by saving $100 per month you manage to put another $5,000 in your 401(k). Your employer has promised to match 100% of your contributions to the retirement savings account, up to 5% of your total income.
After thinking it over, you decide that you would be comfortable living a lifestyle at 70% of your current salary ($35,000) in retirement. Assuming a rate of return on your investments around 4%, you would have to save about $189 per month from now until you turn 67 to retire with a minimal surplus of $2,042. Not bad! If you continue on your current path of saving only $100, however, you'll be over $310,677 short of your retirement goal when the time comes.
Getting an early start on retirement savings can make a big difference in the long run. By saving an extra $89 per month, the 25-year-old in the example above can close the $310,677 shortfall projected by SmartAsset’s retirement calculator.
Let’s try another one. You’ve just turned 40, and it suddenly dawns on you that you’ve not been focusing on your eventual retirement. Fortunately, you’ve been able to put away some solid savings over the years: You’ve got $20,000 in the bank and another $22,000 stored in a traditional IRA. You live in Pittsburgh, where you earn $80,000 per year.
Now that you’re older and wiser, you’re a little bit more optimistic about your investments, and so you assume a 6% annual return. You also plan on living fairly modestly once you retire at 65% of your current salary ($52,000). Under this scenario, you’d only have to save about 8% of your income, or about $533 per month, from now until your 67th birthday.
The Pittsburgh resident in the example above is right on track for a happy retirement. SmartAsset’s retirement calculator projects she’ll have a savings surplus of $8,203 if she stays on her current course.
A Little Late
You’re 54 and you’ve saved sporadically over the course of your career. All told, you’ve got $50,000 in savings, most of it in your bank account, and you don’t expect to ever earn more than 5% on your investments. As a talent agent in Los Angeles, you’re self-employed and have never bothered to set up a retirement account. You make $100,000 and you’ve already decided to keep working until you hit 70.
When you do retire, however, you figure that by cutting back to 70% of your salary ($70,000) you will live fairly comfortable. Bad news: To pull all of that off, you’ll need to save $1,950 every month from now until you retire. That's about 23% of your monthly income. Compare that to the 5% per month you've been saving up until now. If you stay on that course, you'll have a savings shortfall of $488,143 when you retire.
The Best Laid Plans
In the above scenarios, our hypothetical subjects kept their savings in one of a variety of retirement savings options, in either a savings account, a 401(k) or a traditional IRA. There are many ways you can invest the money you set aside for retirement, depending on your goals. The rate of return your money earns depends on the risk you are willing to take on, the success of your particular investment strategy and, to a certain extent, luck. For example, an economic downturn can hurt your investments, at least in the short run. So too can changes in the inflation rate, and other economic events.
All of which is to say: The unexpected can happen, and often does. The best you can do is to develop a solid plan based on the information you have now. Don't let retirement savings statistics get you down. A retirement calculator can help you see how you are doing so far and what you need to change to make your retirement goals. By setting goals and meeting them, you give yourself the opportunity for a rich and rewarding retirement.