Trying to pinpoint the right dollar amount to put away for your retirement nest egg can feel daunting. While there are rules of thumb, there is no standard retirement savings amount. So, how much money do you need to save for retirement? The short answer – it depends.
When and where you plan to retire, your health outlook and desired retirement lifestyle are all critical elements to consider. Do you plan to retire when you’re 55 or work into your 70s? Will you live in a big city apartment, a suburban retirement community or a beachside cabana? Are you in good health, or is it likely you or your spouse will require long-term care? Ask yourself these types of questions before meeting with your financial advisor. Understanding the type of retirement lifestyle you want significantly affects how much you need to save.
Retirement Savings Rules of Thumb
Even though there is no “one-size-fits-all” retirement savings amount, you can use a few rules of thumb to help get a clearer picture of how much you need to save.
The 80% Rule
Experts recommend that your yearly income during retirement should be at least 80% of your pre-retirement income. Withdrawals from your retirement accounts, such as your 401(k) and IRA, savings, Social Security benefits and pension generate your annual retirement income.
The 4% Rule
The 4% rule is a guideline used to estimate your yearly withdrawal rate from your retirement assets. In your first year of retirement, you withdraw 4% of your retirement nest egg to account for your expenses. That initial number is now the basis for your annual retirement account withdrawals. To maintain your purchasing power throughout your retirement, you need to take inflation into account. To account for inflation, multiply your yearly withdrawal amount by the annual inflation rate.
The 15% Rule
If you start saving for retirement as a young adult, your savings goals do not have to be as aggressive as if you start saving later in life. Experts recommend that young workers save at least 15% of their gross annual salary. This 15% is not all out-of-pocket. Instead, the savings come from your 401(k), the 401(k) contribution percentage your employer will match and some out-of-pocket contribution.
Multiply Your Salary
By the time you reach your full-retirement age, or 67-years old according to the Social Security Administration, you should aim to have saved at least 10x your annual salary in your retirement nest egg. You can set incremental savings goals based on your age. At 30-years-old, have 1x your salary saved. At 45-years-old, have 4x your annual salary saved. At 55-years-old, have 7x your annual salary saved. Continue this pattern until you reach your 10x annual salary savings goal at 67-years-old.
Calculating Your Retirement Savings Goal
No matter what age you start saving, there are steps you can take to build a sizable nest egg to get you through your retirement. You can start by getting a savings estimate using a retirement savings calculator. However, this is just an estimate. You should meet with a financial advisor to develop a retirement plan that meets your unique needs and savings goals. Make sure you revisit your retirement plan on a regular basis. As you get closer to your retirement age, your retirement plan and savings goal needs to be more concrete. Your financial advisor can ensure that you are on the right track for your retirement savings goals.
To start your retirement plan or set a retirement savings goal, contact a Fifth Third Bank financial advisor today.