Question: What is enough for savings? – Rita in PA
Laura Adams, author, and host of the Money Girl podcast responds…
Thanks, Rita, it’s critical to have specific savings goals, so you know what you’re working toward and when you finally achieve it.
There are different types of savings that everyone should have, such as an emergency fund and a retirement account. You might also be saving for specific purchases, such as a vacation, education, holiday gifts, or a home down payment.
Let’s assume that Rita is asking how much savings she needs for a comfortable retirement lifestyle. Retirement is the granddaddy of savings goals because it requires a significant nest egg.
The idea is to have enough money invested so that it provides income after you stop working or begin working less. Make a goal to have enough savings to preserve your pre-retirement income or standard of living.
You’ll probably want to buy the same food, shop for clothes in similar stores, and enjoy the same hobbies. Some expenses might be less, such as if you downsize your home, but other costs, such as medical bills and travel, could go up.
A typical target is to have 70 to 80% of your pre-retirement income after you stop working. For instance, if you earn an average of $100,000 in the years leading up to retirement, you might need a minimum of $70,000 to enjoy a similar lifestyle. However, the lower your income, the more difficult it may be to live on less in retirement.
If you have high aspirations for retirement, such as traveling frequently or owning a second home, you may need to save enough to provide more than 100% of your pre-retirement income. Also, your future debt – such as a mortgage or student loans for a child’s college – should be taken into account.
Your Social Security Retirement Benefits
For most retirees, a portion of their income comes from Social Security retirement benefits. To qualify, you must generally work a minimum of 10 years. The benefit you’ll receive is based on the average of your highest 35 years of earnings.
Your Social Security retirement benefit also varies depending on how old you are when you claim it. If you were born between 1937 and 1959, your full retirement age is 66. But if you were born in 1960 or later, it’s 67.
However, no matter when you were born, you can elect to take an early retirement starting at age 62. The problem is, you receive a permanently reduced income, so it’s not always the right decision. To get the highest retirement benefit, you can delay collecting it until age 70.
To learn more about your Social Security benefits, and see your estimated future retirement income, create an online account at the SSA website.
Your Retirement Account Benefits
While having some amount of Social Security to rely on in retirement is great, the program is supposed to be a safety net, not a sole source of income. There are a variety of retirement accounts that come with tax breaks, which make it easier to save as much as possible.
You might use a workplace retirement plan, such as a 401(k) or a 403(b). If your employer doesn’t offer a retirement plan, just about everyone is eligible for an IRA. And if you’re self-employed, there are a variety of retirement account options, including a SEP-IRA and a Solo 401k.
How Much Savings Do You Need to Retire?
I recommend saving a minimum of 10 to 15% of your gross income for retirement until you reach your goal. To generate enough retirement income, most people need to accumulate about eight to 10 times their income. So, if you earn $100,000, having $1 million is a wise goal.
Let’s say you earn $75,000 and want to retire at age 67 with 80% of your pre-retirement income, or $60,000. You can probably count on getting about $20,000 a year from Social Security, and the remaining $40,000 must come from savings.
Assuming you’ll live 30 years and continue earning a conservative rate of return on your nest egg, planning on an income of 5% per year is reasonable. If you divide your annual desired income by this rate, that’s a total savings of $800,000 ($40,000 / .05 = $800,000).
As you can see, multiplying your pre-retirement income by 10, which comes to $750,000 ($75,000 x 10), gets you pretty close to the same number. But if you wanted to have 100% of your income (instead of 80%), you’d need about 14 times $75,000 in savings, or just over $1 million. Using these rules of thumb can give you an estimated savings estimate.
As your income, debt, and lifestyle changes, reevaluate how much retirement income you’ll need and whether you’re saving enough to achieve it. You might have other assets, such as a paid-for home, or income from a part-time job or business, to help boost your retirement savings.
If you’re not sure how much to save, speak with a certified financial planner. They can help you analyze your finances, create a budget, and make sure you can build security for the future.