How Much Do You Really Need for Retirement?
There is no one golden amount to aim for in retirement. Everyone is unique, and specific retirement plans depend on factors that are more complex than a generic one-size-fits-all plan can successfully navigate. However, when deciding where to start when it comes to saving for retirement, there are a few common goals that people can keep in mind.
Goal #1: Saving $1 Million (for a $40,000 per year income over 30 years of retirement)
Depending on where you live and what activities you plan for retirement, a goal of $1 million may or may not actually meet your needs. While it seems like a large amount, remember that you need it to last for the entirety of your retirement. In some states, the cost of living is so high that $1 million won’t even sustain you for 20 years into your retirement. In 2017, GOBankingRates found the average total expenditures for people 65 and older (including groceries, housing, utilities, transportation, and healthcare) and multiplied that amount by the cost of living index of each state in the U.S. They then used that amount to determine how long a theoretical $1 million retirement fund would last in each state. The four most expensive states were Hawaii ($1 million would last just under 12 years), California (16 years, 5 months), Alaska (17 years), and New York (17 years, 1 month). To stretch your retirement dollars further, one would need to consider residing in one of these four cheapest states: Mississippi ($1 million would last 26 years and 4 months), Arkansas (25 years, 6 months), Oklahoma (25 years, 2 months), or Michigan (25 years). If you plan on retiring in the same state in which you live today, make sure you check to see how much your cost of living will be for your specific situation. Remember, you will also have Social Security to tap into, but that amount will likely not make up the difference in the most expensive states. Likewise, if you are still carrying a mortgage into retirement or want to go on expensive vacations, plan on saving beyond the $1 million mark.
Goal #2: Replacing 70%–80% of preretirement income
Income replacement rates refer to the percentage of the preretirement income you would need to replace in order to maintain a similar standard of living once you retire. The general rule of thumb is that most people will need 70%–80%, but this is not always an accurate assessment, since it assumes that expenses decrease after retirement. In truth, many people find that their expenses increase. Retirees are no longer contributing a 401(k) plan or commuting to work, but they sign up for classes and outings, go on indulgent vacations, and often contribute to their grandchildren’s school trips and college funds. Many of the things you dream of doing once you retire will cost money, and that is why those looking forward to an active retirement should try to get to a replacement rate closer to 100% of their preretirement income.
Goal #3: Saving 10%–15% of your current income
If you start saving 10% of your income at age 25, you could retire at 65 with a 70% replacement rate. Most twenty-somethings are now struggling with a high amount of student loan debt, so it can be difficult for them to save 10% toward retirement instead of paying down loans. But consider this: if you wait until later to start saving for retirement, the squeeze on your paycheck will be much, much tighter. A 45-year-old who wants to retire at 65 with a 70% replacement rate will need to save more than a quarter of their income to reach that mark. At this point, the majority of people have a mortgage to pay and family to support, so that kind of aggressive saving is often not realistic. The younger you start, the easier it is — both in regard to the percentage you need to put away and in developing a habit of saving for your future. A 10%–15% saving target will lay down a solid foundation that will set you up for growth and success later on.
Goal #4: Your customized retirement number
Just as your retirement goal must be realistic for your resident state and the activities you want to pursue, it truly must be designed with your desired standard of living in mind. This should include anything you will ultimately want to leave for your children or charity in addition to providing for potential health problems you or your spouse could face. That is why the common goals are really just a starting point: the nitty-gritty details depend on what is achievable for you and how much it will take for the retirement you want.
Representative is registered with and offers only securities and advisory services through PlanMember Securities Corporation, a registered broker/dealer, investment advisor and member FINRA/SIPC. 6187 Carpinteria Avenue, Carpinteria CA. 93013, (800) 874-6910. Randall Wealth Management Group and PlanMember Securities Corporation are independently owned and operated. PSEC is not responsible or liable for ancillary products or services offered by Randall Wealth Management Group or this representative. CA Insurance License: #0727953.
This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.