On average, you need 1.7 million dollars to retire. That may seem like a massive chunk of money, especially if you are just starting off, but it’s easily achievable if you stay diligent.
There’s not just one way to get there, but there are tips and tricks you can keep in mind to improve your overall retirement nest egg. Let’s take a look at some different factors you need to keep in mind to determine how much money you need to retire, as well as strategies for growing your wealth along the way.
Should you save or invest?
64% of people think of themselves as savers, not investors, which is an issue if you’re trying to grow your retirement savings as much as possible. 54% of 401K participants say they take any additional savings and place it in a low-interest savings account. This is obviously advisable if you otherwise don’t have some savings to fall back on if you lose your job, however, if you do have those savings, you need to be investing. Other than 401K accounts, you can put excess savings into IRAs, brokerage accounts, or health savings accounts.
Savings accounts are terrible ways to store cash and in most cases, their interest rates don’t keep up with inflation. Even high-interest money market savings accounts only pay out 2-3%. Annual inflation is roughly 2.3%, meaning that you’re only barely not losing money on the high side of those interest rates.
So, your first goal should be building up some savings to fall back on in case of hardship, but invest anything over that in retirement accounts or through brokerage accounts.
Think about your 401k
401Ks might seem like a box you check on your pay deductions and then never touch until you retire, however, that shouldn’t be the case. You can think of 401Ks like any other investment account, except for the fact that you can’t take out the money before you retire. With 401Ks you can select how you want your investments divided up, how risky you want to invest your money, and you can set annual contribution increases to make sure you stay on track.
Managing 401k accounts actively can insure that they provide the greatest return possible.
Investments are rarely ever set it and forget it ideals, even for retirement.
How much do you need?
We’re finally to the question, how much money do you need stored away in a vault to retire? General expert consensus is about 80% of your pre-retirement income. So, if you make 100,000 a year at age 65, or the year before you retire, you’ll need to have enough saved to cover 80,000 in expenses for every year you plan to be alive in retirement.
You can adjust this amount up and down if you will have other retirement sources of income, like a pension, but in general, this is a good rule of thumb. If you’re ho[ing to travel extensively during your retirement years, you’ll probably want to have even more saved.
So, extrapolating these numbers out, if you plan to retire at 65 and will likely live to 85, and make 100K a year at age 65, then you’ll need to have 20 years of income, or 1.6 million dollars saved. However, think of this as the bare minimum. If there’s a chance you live past 85, you’d run out of money. If you have higher retirement expenses due to health, you might also run out of money. You want to plan for the worst case, because chances are you won’t want to go back to work, or even be able to, at age 70 or 80.
Another way to calculate how much you need to have saved is by using the 4% rule. For this, you divide your required annual retirement salary, 80K, by .04, or the numerical representation of 4%. This roughly estimates that you’ll need 2 million to retire. Both of these methods provide ballpark estimates, but you’re starting to see how just changing a few variables can drastically change how much you need to have saved.
One of the best rules to follow in saving for retirement or just plane financial planning, is the 15/25/50 rule. That means you save 15% of your salary, at age 25, with 50% of that in stocks.
If you’re already over 25 with no savings, then you’ll need to increase that percentage to catch up.
Another general rule to follow is to have an amount saved by 30 that is equivalent to your annual salary. So, drawing back to earlier numbers, if you make 100K a year at 30, you should have 100k in a retirement account.
The benchmarks don’t just stop at 30 tho, by 40 you should have double your annual salary, by 60, 6 times, and by 67, 8 times.
Luckily, thanks to compounding interest, all of this doesn’t have to come in the form of raw paycheck deductions.
For example, if you contribute 15% of your 100K salary at 25, by 65 you’ll have 3.1 million saved. However, you’ll only have contributed 40 years of 15,000 each year. Meaning just 600K from your paycheck. Compounding interest luckily transforms that 600K into 3.1 million over those 40 years.
So, in short, how much should you save for retirement? Roughly 30 times a comfortable retirement salary for you, generally 80% of your last years salary, underscored by the math we just mentioned.