Decide How Much Money is Required

HOW MUCH MONEY DO YOU NEED TO RETIRE?

FIND OUT HOW BIG YOUR NEST EGG MUST BE TO RETIRE ?

You know that you need to save for retirement, but exactly how much money do you really need? The answer to that question is as unique as your fingerprints. There are many factors that go into retirement planning, like how long you want to work and the lifestyle you want to live after you say goodbye to the working world.  

I’ll cover the major factors to consider and point you in the direction of some great online retirement calculators. It’s simple to enter your information and find out approximately how much you’ll need to finance your dream retirement.

HOW MUCH MONEY DO YOU NEED FOR RETIREMENT?

The financial actions you take (or don’t take) today directly affect the security you’ll have in the future. If you’re relatively young—perhaps in your twenties or thirties—retirement may seem too far off to worry about. If you haven’t started saving yet, one of the best ways to get motivated is to figure out the approximate lump sum amount that you’ll need for retirement.  

For most people it’s a shockingly large number that approaches $1 million or is even as high as several million dollars. But before you freak out, you might be surprised by how much you can accumulate when you start saving for retirement sooner rather than later!

Investing early and consistently is an extremely powerful yet simple way to grow your retirement portfolio.

HOW COMPOUNDING INTEREST WORKS ?

The more time you have until retirement, the more you’ll benefit from compounding interest. Here’s an example: Let’s say John invests $100 a month beginning at age 25 in his 401(k) retirement plan at work. His co-worker, Polly, also invests $100 but she starts at age 35. Assuming they both get an 8% annual return and both retire at age 67, John will have over $412,000. But poor Polly will have less than $178,000. Investing early and consistently is an extremely powerful yet simple way to grow your retirement portfolio.

HOW TO FIGURE OUT HOW MUCH MONEY YOU NEED FOR RETIREMENT ?

Here are eight variables that influence how much you’ll need for retirement—they’re also the types of data that you’ll be prompted to enter into a retirement calculator:

The age you want to retire. How long you want to work is an important variable because the earlier you retire, the more you’ll need to save. Most people use the date they’ll start receiving Social Security benefits (somewhere in their mid-sixties) as their default retirement date. But if you accumulate a large nest egg, it’s possible to retire much earlier.

How much you already have saved. As I mentioned, the earlier you start saving for retirement, the more likely you are to reach your goal. The more money you already have working for you, the better.

How quickly your money will grow before retirement. The average annual rate of return you receive on your investments before retirement is super important. For example, if you invest $100 a month for 40 years at a 5% annual return, you’ll have over $152,000. But if you get a 10% return instead, you’ll have over $632,000! There’s no way to predict the growth of your retirement portfolio, but most retirement calculators default to 7% or 8% because that’s consistent with historical stock market returns. 

How quickly your money will grow during retirement. The average annual rate of return on your investments is likely to be lower after you retire. That’s because you’ll want to keep your nest egg in low-risk investments to keep it safe. Retirement calculators may suggest a rate in the range of 4% to 6%.

How much Social Security and other income you’ll receive. Social Security and any other additional income that you expect to receive, such as a pension, must be included in your retirement planning. If you’re an average worker, Social Security benefits may replace approximately 30% of your pre-retirement income. However, benefits may be reduced in the future and the age you can collect them may also go up. Go to ssa.gov to find projections for your annual Social Security retirement benefits.

The inflation rate. Inflation is a rise in prices over time that makes money less valuable. Let’s say you want to have a million dollars when you retire in 30 years. Assuming a 3% rate of inflation (which is what it’s generally been in the U.S.), you’d actually need to have over $2.4 million dollars saved up to compensate for the gradual rise in prices of goods and services over the next 30 years!

How long you’ll live. Your life expectancy is certainly unknown, but unless you have a reason to believe that you won’t be healthy, it’s likely that you’ll live well into your 90s. So even if you retire at age 75, you may need enough to live on for another 20 years.

How much you’ll withdraw annually during retirement. How much money you’ll take out of your nest egg each year is very important. Most retirement calculators ask you to estimate this amount as a percentage of your pre-retirement income. Many people believe they can live on less during retirement—perhaps 80%. But if you plan on taking lavish trips, living in an expensive area, or believe you may need costly medical care, you may need much more to finance your retirement.

ARE YOU SAVING ENOUGH FOR RETIREMENT?  

ONLY YOU CAN DECIDE

For Example : I'm 37, single and make $90K. I've saved about $40K in my 401(k) and IRAs, but I'm concerned I'm not saving enough. In a recent article, you stated that a couple who saved $395K by age 45 would be off to a good start -- does this mean I should save $35K a year for the next 10 years? Yikes!

What's the best plan for someone my age? Should I invest more in my Roth or in my 401(k)? I'd still like to retire by 65. Is that reasonable?

No need to panic! With the start you have, retiring at 65 is reasonable -- as long as you put a solid savings plan in place and stick with it. Because when it comes to retirement savings, how much is enough is a personal question. It all depends on how much you plan to spend.

So first ask yourself: What does retirement look like to you? Will you need more money to live on during retirement than you make now? Could you be content with less? Your answers will help determine how much you need to save to produce the income you want.

While the idea of "enough" varies with each individual, there are some savings guidelines that can help you reach your personal retirement goal. Start following them now, and chances are you'll be well prepared for the future.

HOW MUCH TO SAVE

You've got a great start, but depending on how you answer the questions above, I suspect that you need to get even more serious about saving. Assuming you want to maintain your current lifestyle in retirement, at your age you should aim to save between 15 percent and 20 percent of your yearly salary. For you, 20 percent would be $18,000, not $35,000. Stick with this percentage over time and, as your salary increases, you'll automatically save more.

WHERE TO PUT YOUR MONEY

It's great that you already have a 401(k) and a Roth. These tax-advantaged accounts are the best way to make your money grow because earnings compound tax-deferred or tax-free, in the case of a Roth IRA. I recommend that you start with your 401(k). Not only does a 401(k) (or a Roth 401(k), which some companies provide) often have the benefit of a company match, it also has the advantage of putting your savings on autopilot (of course, you can also set up automatic deposits to your IRA).

Since you have both types of retirement accounts, you might consider dividing your contributions in this way to make the most of each:

-- First, contribute to your 401(k) up to any company match.

You certainly don't want to turn down free money.

-- Next, put the maximum contribution in your Roth IRA (currently $5,000). This diversifies your savings and will give you the benefit of tax-free withdrawals in the future.

-- Finally, if you can, contribute up to the 401(k) maximum, which is currently $16,500.

If you're able to max out both of these accounts, you'll save $21,500 a year. In your case, that's 23 percent of your salary, which would put you on a really solid path toward retirement. And that doesn't even take your company match into account.

MORE WAYS TO SAVE

Of course, it's not easy to put away this much money all at once, especially if your economic responsibilities change. But what you save and spend now may well be the most important factors in achieving your retirement goals, so it's definitely time to ramp up your savings.

HERE ARE SOME IDEAS !

-- Earmark a portion of any salary increase for your 401(k) and/or IRA. For instance, increase the percentage you put in your 401(k) every time you get a raise. Because your contribution is pre-tax, a small increase won't significantly reduce your take-home pay.

-- Invest any tax refunds in your IRA.

-- Put other windfalls, such as an inheritance or annual bonus, toward your retirement savings.

And look for other small ways to save. Restaurants, transportation, gym fees, Internet and phone fees -- many of these costs can be trimmed to increase your savings.

USE REAL NUMBERS

It always helps to have real numbers in front of you. Try an online calculator. You can plug in your current savings, your salary, when you want to retire and how much you plan to save each year to see how much money you can realistically accumulate.

By planning now and making savings a priority, you have a very good chance of reaching your goal. Best of luck!