If you’re lucky, your retirement will last for many years and be filled with family, travel and lots of new experiences.
But as you plan for your life in retirement, inevitable questions arise. How much income will you need and how much money should you save to hit that target? How can you anticipate how long your savings will last? And how can you tell if you’re on track to reach your goals?
Many retirement planners suggest being prepared to spend about 80 percent of your highest pre-retirement income per year after leaving the workforce. Most people live another 10 to 20 years after retirement, so it’s important to think about the long term when planning how much to save, according to Equifax.
To reach the 80% goal, experts suggest setting aside at least 15% of your annual pre-tax income for retirement. For example, if you earn $50,000 per year, it’s a good idea to put around $7,500 per year toward your retirement savings. In this example the goal would be to end up with $40,000 in savings for every year spent in retirement.
What sources of income will you have in retirement?
During retirement, your earnings will be replaced by alternate sources of income. These might come from government programs or from your own retirement planning. Common sources of income in retirement include:
- Social Security. Social Security is a government-administered insurance program that acts as the main source of income for many retirees.
- Pension. A pension is a retirement arrangement in which an employer agrees to pay an employee a certain amount of money each month for the rest of the employee’s life. The monthly amount depends on the employee’s years of service and their salary prior to retirement.
- 401(k). Unlike pensions, many employers today offer a 401(k) retirement savings plan. The retirement income that results from employer contributions is essentially free money and can really add up over time.
- Individual Retirement Account (IRA). An IRA is a retirement savings plan that allows you to contribute up to a maximum amount of money each year. You can make combined contributions of up to $6,000 to one or more IRA accounts if you are under age 50, and up to $7,000 if you are aged 50 and older.
- Other income. You might also have other miscellaneous sources of income, such as brokerage accounts, traditional savings accounts, and certificates of deposit.
Withdrawing money in retirement
When determining how long your money will last in retirement, it’s important to think about the rate at which you will withdraw your funds. Retirees should aim to find a safe withdrawal rate, meaning a percentage of your savings that you can withdraw each year of your retirement without running out of money
As with all retirement planning, the exact answer will vary from person to person. However, experts generally recommend withdrawing no more than 4% to 5% of your savings in the first year of retirement. In the years that follow, adjust your withdrawal amounts to account for external factors such as inflation or fluctuations in the stock market.
Also, be sure to consider how your personal goals in retirement may affect the rate at which you withdraw money. For example, many people aim to travel or pick up a new hobby during retirement. If your intent is to travel while you’re still in good physical health, you might choose to withdraw more in the years shortly after you retire and reduce that amount as your travel tapers off.
Your life and career are ever-changing, and your retirement plans should be as well. Once you master the basics of building your savings plan, it’s equally important to check your progress regularly and adjust where needed. Don’t be afraid to update your plans from time to time so that you can feel confident that your savings will last throughout retirement.