Retirement can account for one-third or more of your clients' adult lives, and those years are not cheap. Property taxes rise in tandem with increasing property values. Then there are health care and increasing prescription drug expenditures on top of long-term care expenses.
1. Calculate the items your savings will pay for once you've retired.
Knowing how you want to live in retirement may allow you to sort out how much money you'll require to support that living. If you wish to explore the world in style, you'll need a larger budget than somebody who wishes to watch birds from their backyard every morning.
Most of the costs you had before retirement will be covered by your assets in retirement. A few of them are:
Don't forget to plan for debts you might incur after retirement. For example, if you are using credit cards, you need to pay off credit card bills in full each month to avoid interest charges or late fees. If you experience heavy credit card debt, you might want to ask a legal expert about how to settle credit card debt once and for all.
Don't forget to factor in inflation and how it will affect your money. For example, inflation rates in 2021 exceeded 6%, the highest in decades. While this is significantly higher than the average over recent decades, you should factor in annual inflation of about 2%.
2. Calculate how much you should save each year.
Now that you know how much money you'll require, you can figure out how much you should save each year.
Aiming for a multiple of your annual earnings is a straightforward method to calculate your savings objectives. While the exact amount depends on your estimated retirement costs and the individual investments you chose for your retirement portfolio, these figures might help you get a clearer idea of where you stand.
According to Fidelity Investments, you must set aside at least 15% of your pretax income for retirement. Many other financial planners suggest saving at a similar rate for retirement, and findings from Boston College's Center for Retirement Research back this up.
On the other hand, preparing for retirement isn't always as simple as putting aside 15% of one's earnings. The 15% rule of thumb assumes various things, including that you start saving in the early years of life. You'll need to start saving at age 25 if you intend to retire by 62, or at age 35 if you wish to retire by 65.
It also implies that you'll need an annual income of 55% to 80% of your pre-retirement salary to live a comfortable retirement. More or less may be required based on your spending patterns and medical bills. For many people, though, 55% to 80% is a good approximation.
Finally, the 15% rule will not give you a retirement fund that will cover all of your expenses. Social Security, for example, will most likely provide a portion of your retirement income. Overall, the 15% projection should give you a regular retirement income that lasts into your early 90s, at roughly 45% of your pre-retirement salary.
Not everyone can begin saving at the age of 25 or continuously save 15% of their income toward retirement. To compensate for the lack of time and accumulation, you may need to work longer, eliminate more costs, or put more of your income into retirement if you begin saving later in life or save a little less.
Fidelity offers some easy retirement savings standards by age to help measure your retirement saving progress, regardless of when you start saving or how much you can put away.
Age Multiple of Annual Salary Saved 30 1X 40 2X 45 4X 50 6X 55 7X 60 8X 67 10X
3. Consider other sources of income.
For retirement, there are various savings methods and income sources to consider. These factors can influence how much you require to save now, based on your sources of income.
- An IRA. Individual retirement accounts (IRAs) are available from various financial organizations, including banks, credit unions and brokerage firms. Traditional IRAs and Roth IRAs are the two most common varieties. Each has its own set of tax benefits based on your particular circumstances. In 2022, individuals can deposit up to $6,000 per year to an IRA, which can be used to invest in various assets and even real estate. If you're over 50, you can contribute up to $7,000 each year to an IRA.
- A pension plan. A pension plan might also offer you a regular income source. If your company offers one, find out if you meet the criteria, how much money you'll get, and the pension criteria.
- A 401(k). These employer-sponsored investment instruments let you save and invest up to $20,500 per year (in 2022) for your retirement, or up to $27,000 if you're over 50. Your contributions to a 401(k) can be invested in a range of diverse securities, and your company might match your contributions. At age 59½, or sooner with certain restrictions, funds can be given without penalty.
- Annuities. Annuities are a form of insurance against running out of money in retirement that may contain an investment component. After the purchase of an annuity, you will get regular payments over your retirement life.
- Social Security benefits. Social Security benefits are available to retirees 62 and older (or those who become disabled or blind) who have worked long enough to accumulate sufficient credits to be eligible for the program. This can give a reliable source of income throughout retirement.
