How Much Money Do You Need to Retire?
As time goes on, the "rules" about the amount of money needed to retire are changing, and if you're savvy, you can get ahead of the curve.
As the financial landscape zooms by at breakneck speed, the days when you could count on Social Security and perhaps a small pension to carry you through your golden years are distant blips in the rearview mirror. Some say that those reputed golden years lasted only about a decade or so anyway, so perhaps instead of pining for the good old days, we should simply concentrate on what we know today and what we can best predict will happen tomorrow. The truth is that today Social Security isn't much more than additional income for your retirement years, and cannot be counted on to be the main source of financial support.
The money needed to retire these days is a significant amount, but if you're in your 50s and don't have a mountain of savings, don't panic, you can still make up for lost time. Particularly if you own a home or have children you've been supporting who will be graduating college and come off your books, your 50s are your chance to save some real money to put away for retirement. While you shouldn't panic, you should definitely take a long hard look at your financial situation and start saving aggressively, max out your 401(k) if you have one, and start an Independent Retirement Account (IRA) if you haven't already done so.
A Rough Estimate
A 2007 study conducted by the Employee Benefit Research Institute estimates that men on average will need to have 12 times their current income level and women will need 14 times their income level (due to their longer life expectancy) for retirement. You can do a quick calculation of your current income level and determine (roughly) the money needed to retire comfortably.
Another method of estimating your needs is to aim to replace about 75% of your pre-retirement income during retirement.
Saving and Creating a Retirement Plan
Once you've got this estimate, you can create a plan to reach the goal. If you're a younger worker (in your thirties), you should aim to save about 10-15% of your income for retirement. This means putting away 10-15% of your income into your 401(k) and maximizing your contribution to the policy and putting away anything beyond the contribution limit into a traditional or Roth IRA. If you're an older worker (in your late 40s or 50s), you should plan on saving more for retirement.
Social Security will likely replace about 20 to 30 percent of pre-retirement income. The rest will have to come from savings and retirement accounts. While it may be sobering news, the important thing is to act decisively and save as best you can. And don't feel as though you're alone--a majority of Americans do not have a proper retirement plan. By most accounts, a majority of the population does the bulk of their retirement savings in their 50s (because the kids aren't depending on you and perhaps your mortgage payments are ending). But once you make an estimate of what you'll need, it's usually a wake-up call to take strong action.
Another action Americans are taking is to delay retirement. As life expectancy increases, the retirement age increases as well, and many people want to continue working. An added bonus to the continuing income level is that your retirement accounts will continue to grow while you're working, and your Social Security benefits also increase for each year past your normal retirement age (as determined by the government for Social Security purposes) that you begin taking benefits. Even having a part time job so that you can defer taking Social Security benefits can be a good idea. For those late to the retirement planning process, these extra few years can really help.