How Do I Set Up A Retirement Goal?

How Do I Set A Retirement Goal?

A lot of people are confused as to how much money they need to save to be able to enjoy a comfortable life in retirement. There is nothing worse than retiring too early and being forced to go back to work full time in the golden years of your life. When you finally retire, you want to make sure that you have enough money to stay retired. If you choose to work part-time, then you want to make sure it is your choice and not because you are forced to in order to live. This post will help you figure out how much cash you need to have to retire.

How much yearly income is feasible for retirement?

How To Set a Retirement Goal

Let’s start with a time period. We will base all our assumptions on a 30 year time period.

Let’s say your current salary is $60k a year.

You generate $5,000 a month in income

The minimum you would need to save to enjoy a comfortable lifestyle is 80% of your pre-retirement income. 

This equates to having about $48k a year.

$4,000 a month in income

The 4 Percent Rule

Next, we will use the 4% rule. The 4 percent rule suggests withdrawing 4% of your savings each year and adjusting this amount due to inflation.

Living off of 4% of your money in investments. Investments are based on a balanced fund approach (50% stock, 50% fixed income investments).

If you want to live off $48,000 a year and plan on being retired for 30 years

($48k divided by .04) = $1,200,000 is the goal

This would allow you to withdraw $48,000 for 30 years

It is 4 percent the first year and then the amount adjusts with inflation.

Target – $1,200,000

Next Start Looking At Your Social Security Benefits

The average Social Security benefit in America is $1,500.

Let’s assume you get $1600 a month in retirement which equates to $19,200 a year.

You can subtract that from the $48,000,

($48,000 – $19,200) = $28,800

($28,800 divided by .04) = $720,000 is the new goal

Now with Social Security included you only need $720,000 to have $48,000 for 30 years.

If you have any other retirement income, you can reduce the targeted financial goal.

The 3.3% Rule

There is a new standard in personal finance that suggests using 3.3% as a more conservative investment metric for withdrawals due to sky high inflation levels and a burgeoning bear market. 

The 3.3 percent rule suggests withdrawing 3.3% of your savings each year to account for higher inflation levels and lower market returns.

Let’s rerun the numbers based on living off of 3.3% of your money in investments.

If you want to live off $48,000 a year at a 3.3% withdrawal rate:

($48k divided by .033) = $1,454,545.44 is the goal

Our new target savings goal has increased by over a quarter of a million dollars ($254,545,44) in order to hit the $48,000 annual withdrawal rate for 30 years.

Using The Same Social Security Benefits

Let’s assume you still receive $1600 a month in retirement which equates to $19,200 a year.

You can subtract that from the $48,000.

($48,000 – $19,200) = $28,800

($28,800 divided by .033) = $872,727.27 is the new goal

Now you would need an additional $152,727.27 per year.

It is better to err on the side of caution and use 3.3% as your savings standard.

Tips

If you plan on working part-time in retirement, that lowers the amount of money needed in retirement.

Aim for a 100 percent salary match rate so you hit the monthly amount you were earning before retirement.

The minimum savings rate of your salary should be 10%. This rate works in your 20’s. You need to increase your savings rate early decade. This savings rate should increase as you age. You should aim to increase it to 50% by your 60’s.

Remember that the closer you get to retirement, the more conservative your investments must become.

In retirement you have two choices: either boost your income or eliminate expenses.

Savings Goals

  • In your 30’s you need to save 1-2 times your annual salary.
  • In your 40’s, you should have 2-3 time your annual salary saved.
  • In your 50’s, you should have 4-5 times your annual salary saved.
  • In your 60’s, you should have 6-8 times your annual salary saved.
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