The idea of retirement is about as bittersweet as it gets. On one hand, having minimal daily obligations and having all your time at your disposal sounds amazing. On the other hand, the mere idea of trying to not only predict decades of living expenses but also save up all that cash is enough to make anyone panic.
Take a deep breath. It’s all about planning and running the numbers. It’s never too late to improve your outlook for retirement.
To begin, the first thing you need to know is the magic number. How much should you have in savings when you retire?
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Setting a Savings Goal for Retirement
While there are safety nets in place to help retirees make ends meet, we all know there are no guarantees. With that in mind, your ultimate goal is to save enough money that you don’t need social security to live.
Fortunately, there’s a simple formula available for finding the magic number you want to see in your savings account.
Step 1: Calculate Your Replacement Income
In retirement, “replacement income” is the amount of money you have to live on each year.
The general rule of thumb is that your replacement income should be 80% of your salary. The reason for this is because people tend to live just within their means, so the higher your salary is, the higher your living costs tend to be.
You should base this on your current salary. If you’re making $60,000 per year, around the national median for a household, you want your replacement income to be $48,000 per year.
Of course, there are exceptions. If you’re struggling to make ends meet today, you might want to aim for a higher yearly number.
You can also take another path of adding up all your expenses to see how much you would need to maintain your current living standard. Don’t forget about expenses that don’t come every month, like healthcare expenses, vacations, and property taxes.
Remember to include expenses for entertainment as well. With all this totaled together, you’ll have your replacement income.
Step 2: Calculate Your Post-Retirement Life Expectancy
If you want to know how much money to save for retirement, you have to know how long you expect your retirement to be.
Start by considering your life expectancy. You can use a simple but general longevity calculator to do this. You can also go with a more in-depth actuarial service, which considers your health, your family history, and other information.
Let’s look at the average. The general life expectancy in the US is around 79 years of age.
While the age for retirement benefits is increasing in the US, let’s stay on the safe side and assume you’re retiring at 65. If you retire at 65 and live to the age of 79, you’ll need enough retirement savings to last 14 years.
Step 3: Run the Numbers
From here, all you need to do is a simple calculation. Multiply your replacement income by your post-retirement life expectancy.
Using the examples above, you’d multiply $48,000 by 14. This gives you a savings goal of $672,000.
Are Americans Meeting Their Retirement Savings Goals?
Now that you know your “magic number,” you may be stressing about how far behind you are. Are you alone in that worry?
No, you aren’t. In fact, the average retirement savings for people between the ages of 56 and 61 are just $163,577. Keep in mind that these are people who are within ten years of retirement or less.
While you’re in good company, our goal is to help you and the millions of others who are struggling to get on track with their retirement savings.
Tips for Saving for Retirement
Now that you have a goal, how do you ramp up your efforts so you can work toward it more quickly? Start with these tips you can start using today.
Don’t Turn Down Free Money
Whether your employer offers a 401(k) or you’re putting money into your own IRA, max out your benefits. Contribute the largest amount that will give you employer matching, tax-free deposits, or other savings.
If you’ve been using a standard savings account to save for retirement, now is the time to move your money to an IRA.
Set Up Automated Deposits
Technology has come a long way, and you can use it to make saving money less painful.
Many banks have programs that allow you to put micro-deposits into a savings account without you noticing. For example, your program may “round up” each purchase and put the change into a savings account.
You may also be able to set up an automated transfer on your paydays. Every time you get paid, the bank will automatically transfer a certain amount to your savings or retirement account.
This takes away some of the mental pain of watching your hard-earned money flow out of your checking account.
Make Debt Repayment a Priority
One of the largest factors that holds back people from saving up as much of a retirement fund as they want is debt. In particular, we’re talking about high-interest debt.
Look for ways to trample your credit card debt, student loan debt, and other expensive products quickly. One popular option is to get a lower-interest personal loan to pay off credit card debt. Not only will you pay less over time, but the structured payments will force you to make progress.
How Much Should You Have in Savings at Retirement? As Much As Possible.
After reading all this, you’re probably neck-deep in number, figuring out how much to save and where you can cut your budget. When it comes down to it, though, how much should you have in savings when you retire? As much money as possible.
Remember that because of the interest you can earn in a retirement account, small contributions today can amplify by the time you retire.
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