As the reality of your retirement approaches, you’re probably feeling a mix of excitement and dread. Balancing your expectations of the freedom that comes with retirement with the costs associated with it can be difficult, so planning ahead of time is essential.

It’s never too early to start thinking about “how much money will I need to support the retirement I envision?”

Consider how you want your life to be. Will you spend your days wandering the globe? Do you intend to stay at home and garden, or do you intend to spend time with your grandchildren? Once you’ve answered these questions, you can make a plan and begin saving the money you’ll need. Before you begin your retirement, you should consider four factors.


How much money are you planning to spend?

A good rule of thumb is to keep at least 80% of your pre-retirement income. The 80 percent assumes no payroll taxes for Social Security or money deposited into a 401(k) (k). You’ll save money by not having to pay for commuting, dry cleaning, or work clothes. Consider whether or not you will receive Social Security or a pension.

For example, if you spend $50,000 per year before retirement, you’ll need at least $40,000 in retirement to meet the 80 percent rule. If you or your spouse receives $24,000 per year from Social Security, you will need to save approximately $16,000 per year. Keep in mind that if you withdraw from a traditional IRA, 401(k), or tax-deferred savings account, your tax liability is reduced based on how much you pay in taxes.

The 80 percent rule does not take into account how much money you will spend. In the early stages of retirement, most people enjoy traveling, and the costs can quickly add up. Another expense that is overlooked is medical care. Medicare Part B covers the majority of doctor’s visits but costs $148 or more per month. Medicare also requires you to pay 20% of doctor bills and more than $200 in deductibles. It is estimated that a couple will need nearly $300,000 to cover medical expenses in retirement.

Then you must decide whether or not to leave an inheritance to your children or grandchildren. If you do, you’ll need more money to cover everything you want to do.


How Much Will Your Savings Earn You?

Nobody knows what stocks, bonds, or bank certificates of deposit will produce over the next two decades. Economists have a rough estimate of what it will gain based on historical data (10% for stocks, 5% for bonds, and 3% for treasury bills), but this is subject to change.

Most people do not put all of their money into a single investment. They will invest some in stocks to grow capital and some in bonds to protect against a stock market decline. Financial planners advise their clients to invest small sums in portfolios because the returns aren’t always the best. If you set your sights too high, you risk losing too much money all at once.


How long do you think you’ll live?

While that question is not easily answered, we can get a general idea by looking at an average lifespan. According to Social Security, the average man lives to be about 83 years old, while the average woman lives to be about 85 and a half years old. When it comes to retirement savings, most people plan with a shorter life expectancy in mind. It’s worth thinking about how long your parents and grandparents lived. This will give you a better idea of how long you should save. To be on the safe side, plan for your retirement to last until you’re around the age of 90.


How Much Can You Withdraw From Your Savings Account Each Year?

The 4 percent rule can assist you in making this decision. You divide your annual retirement income by 4 percent. If you have $250,000 in savings, for example, you can withdraw $10,000 in the first year. For the next 30 years, each year will need to be adjusted for inflation. The higher the withdrawal rate (7% or higher), the more likely you will run out of money before the 30-year period is up.


Savings based on Age


It is recommended that you have an amount equal to your annual salary by the time you reach the age of 30. Beginning at the age of 25, you would need to save 15% of your gross salary and invest 50% of it in stocks. At 40, you should have two times your annual salary, four times at 50, six times at 60, and eight times at 67.

Another formula you can use requires you to start saving 25% of your gross salary each year in your early twenties. By the age of 30, you should have saved up a full year’s salary. Two times your annual salary when you’re 35, three times when you’re 40, five times when you’re 50, six times when you’re 55, seven times when you’re 60, and eight times when you’re 65.


Last Thoughts


Most Americans can increase their savings at the very least through a 401(k) (k). While you may not have started saving until the age of 25, this does not mean that all hope is lost. You don’t have to follow these formulas exactly, and something will often come up that will throw you off track. The more you can save, however, the better off you’ll be in the long run.