Does the thought of retirement worry you? Are you unsure about how to get through your retirement without facing financial problems?
“How much do I need to save for retirement?” Unfortunately, there is no perfect answer as it varies from person to person. This article will help you figure out the best retirement savings plan for you and your family. See below for a few important questions and considerations:
What kind of retirement do you want?
This answer is contingent upon your lifestyle and what you define as comfortable. You will most certainly need to save enough to cover your basic living expenses such as mortgage, utilities, insurance, and groceries, along with other unexpected expenses. If you want to live a luxurious life after retirement, you need to plan accordingly.
How do I estimate my future cost of living?
Future income requirements depend on your current level of expenditure. Start by making a list of your typical monthly expenses and think about whether the expenditure will increase, decrease, or cease to exist in the future. Jot down these rough figures and add them up. Include other things you would want to spend money on later. This will allow you to get a rough idea of your monthly post-retirement expenditures. Multiply them by 12 to get the estimated annual net retirement income.
What happens to my pension when I retire?
When you finish working, you need to turn your pension savings into an income for your retirement. There are a number of different ways you can do this, and what suits you best depends on the type of pension you have, how much you have saved, and how long you are likely to live for. Your net retirement income does not have to come entirely from your savings. You might be entitled to collect government’s pension benefits. But you will have to pay taxes on them, and the rate you pay depends on your total income for the year.
How will inflation affect my retirement?
The price of almost everything is bound to rise in the future. Some experts predict that the average inflation rate will be about 2% per year by 2050. Based on this calculation, your net retirement income will be higher than expected. You can use an inflation calculator to convert your predicted retirement income to future dollars, so that you get a rough idea of how much to save.
What kind of taxes should I expect in retirement?
Whether you invest in individual retirement accounts (IRA) or a 401(k) plan, you will need to pay income tax on withdrawals once you retire. The exact amount you pay will depend upon your taxable income, and whether you are an individual or a joint account holder.
5 Key Steps to Consider in Retirement
Assuming your retirement age at 65 in 2050, here is how you can calculate your retirement income requirement, adjusted for taxes and inflation.
1. Estimate Current Lifestyle Expenses
Estimate your current annual expenses including your mortgage, utilities, insurance, groceries, and other expenses.
2. Estimate Future Net Income After Taxes
Calculate your expected pension benefits and reduce the taxes at the rate of 20.05% per year.
3. Calculate Retirement Income Requirements
Reduce net income amount from your lifestyle expenses to arrive at your annual retirement income requirement from savings.
4. Adjust for Inflation
Adjust for inflation and assume the net annual retirement income from your savings will be lower.
5. Adjust Future Net Income Requirements for Taxes
To earn this net income, you would need an annual gross (before tax) income. Paying an annual income tax which can be calculated using the marginal tax rate of 20%.
Some Useful Tips
Below are some useful tips to consider as you approach retirement:
Use a Retirement Income Calculator
A Retirement Income Calculator can help you estimate the total savings you will need to generate the annual income you’ve calculated above.
Adhere to the 80% Rule
One of the most common rules of thumb is the 80% rule, which means you should aim to replace 80% of your pre-retirement income. Experts recommend saving 10% to 15% of your pre-retirement income annually to reach the 80% mark.
Consult a Financial Advisor
A little guidance never hurts. A financial advisor can run a more sophisticated risk and tax-analysis of your portfolio and help you select the best investments to reach your retirement goals.
Save. Save. Save!
Figuring out how much to save for retirement is a multi-step process. Keep the above points in mind, talk to your friends and family, consult the best financial advisors for retirement, and devise a solid plan to generate retirement income solutions. Don’t wait until it’s too late. Start saving now!