18 Jul Thing to Consider When Calculating How Much Money You Need in Retirement?
Financial experts have increased the amount recommended for retirement, declaring that one million dollars is not enough for a comfortable retirement. Now, most wealth managers recommend an investment portfolio of two million or more to avoid running out of money.
When the Government Accountability Office reveals that the median savings for investors between 55 and 65 are only $107,000, setting aside, even a million dollars can feel more like a dream than reality.
The good news is that it may not be necessary to save two million or even one million dollars in investments to retire comfortably.
When deciding how much money you need to set aside, consider the following:
Lifestyle is Everything: The lifestyle you want will have a direct impact on the amount you need in retirement. If you desire to travel the world or play golf every day, you need a lot more money than if you choose to spend your days reading, volunteering, and enjoying the grandkids.
Existing Debt Directly Impacts Income Needs: Every bill you carry into retirement increases your retirement income requirements. For instance, a $1,000 mortgage will add $12,000 a year to the equation. A decade of mortgage payments can add an extra $120,000 to your direct costs.
One of the fastest ways to reduce income needs is to lower your debt. Pay off credit cards and student loans and downsize your home if necessary, to retire without a mortgage and lower your investment nest egg needs.
The Longer You Work the Less Money You Need. Another major factor in retirement costs is the number of years you must fund. Working until you are 70, will not only reduce the years in retirement but will give you more time to beef up savings and increase your Social Security payout.
Healthcare Costs Are the Great Unknown. When calculating income needs in retirement, you must consider living expenses, investment performance, inflation, and health care costs. Unfortunately, relying solely on Medicare can leave you with thousands of dollars annually in out of pocket costs.
How Much Will You Need in Retirement?
After considering the above factors, you will have a rough estimate of your annual income needs in retirement. From there, identify the income streams available to cover those costs.
Most Americans will draw Social Security income. You might also have a pension, rental income, an annuity, or other guaranteed income sources. Determine whether these will adjust for inflation when calculating your cash flow.
While it is not possible to have an exact figure because you do not know how long you will live and your long-term health care costs. However, you can determine a rough estimate by subtracting the income needs from your income streams and multiply it by your estimated longevity.
For example: Let’s say you want to receive $50,000 a year in retirement. If you work until you are 70, you can maximize the social security payout by about 30%. Currently, the average Socials Security check is $1,422. Waiting until 70 can increase that amount to $1,848, providing an income of around $22,000 per year. In this scenario, if you have no other income streams, you must replace $28,000 per year in retirement plus inflation, and medical costs, leaving you with an investment savings goal of around $500,000.
Today, it is not uncommon to spend 20 plus years in retirement. Social Security can provide a valuable safety net, but is not enough to sustain you throughout retirement without additional income resources. Because you are here reading this now, that’s great news and the first step to securing your retirement success goals! Begin your plan of action today with the first step of promoting less debt in your life.
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