The Investment Company Institute reports that at the end of 2020, retirement market assets in the United States totaled $34.9 trillion. Collectively, that’s a large number. But there are a great many Americans who are unsure if their retirement savings are on track. So, we ask: Are you saving enough to retire? The information in this article can help you find out.
Every American wants to retire comfortably. But first you must accumulate the retirement savings to do so. In fact, retirement savings should play a large roll in your overall financial planning strategy throughout your life leading up to retirement. In a perfect world, you began socking away retirement funds in your early 20s. But the world is not perfect, and many older Americans feel the pressure and stress of not having ample savings to retire.
So, how do you know if you are on track to retire and live the lifestyle you desire? There are ways to determine the income you’ll need to leave the workforce behind and enjoy your golden years. Careful planning and lifestyle changes can impact your ability to save adequate retirement funds. And, regardless of your age, it’s never too late to start saving.
Below are a few guidelines that can help you determine how much you’ll need in retirement and some planning strategies that will help you get there.
How Much Money Do You Need to Retire?
Knowing how much money you’ll need to retire is the first step in determining if you’re on track. Financial planners and other experts have formulas that help project how much income you’ll need in retirement. In general, these professionals say that by the age of 50, you should try to accumulate five to six times of your annual income for retirement. In retirement, the rule-of-thumb is to live off 4-5 percent of your retirement savings annually. Using these guidelines, you can evaluate your current financial position and project your future financial potential. This can help you define and make any adjustments you see fit to help achieve your retirement goals.
Online tools like Bankrate’s retirement calculator can help you crunch numbers to uncover what your finances in retirement look like and how much you should save. Smartasset’s cost of living calculator can help you determine what your expenses in retirement may be relevant to where you plan to live.
Where Will Your Retirement Income Come From?
There are several well-known resources you should be able to depend on in retirement.
- Social Security benefits: While you can’t depend solely on these benefits, you can include them in your annual retirement income potential. Find out what your monthly projected payment will be by creating an account on the Social Security Administration’s website. Your payment is calculated based records of contributions to Social Security over your lifetime.
- Retirement plans: Including Roth IRAs and traditional IRAs and/or employer sponsored plans (defined benefit plans, defined contribution plans, 401(k)s). If you’ve established and contributed to any of these savings accounts, you can depend on income from your required minimum distributions (RMDs) in retirement. These IRS guidelines can help you project what your annual distribution may be when you retire, depending on the account balance.
- Other assets: (real estate, investments, liquid and illiquid assets): If you continue investing in your retirement years, these avenues provide added income potential.
Additional retirement income can be found within these resources:
- Part-time employment: Many Americans are opting to work part-time during retirement to supplement their income.
- Home ownership: The extra income you gain by paying off your mortgage before you retire can be a tremendous help.
- Personal savings: Many financial advisors encourage having an emergency savings fund for unexpected expenses. If you’ve established one throughout your lifetime, this money can be included in your calculations for retirement income.
Health savings accounts (HSAs):HSAs are tax-advantaged accounts that present a strategy that can significantly supplement retirement savings. HSA funds can be used for qualified medical expenses before and in retirement. HSA funds used in retirement keep you from dipping into your limited RMD dollars to pay medical costs. Distributions from HSAs are tax free as long as they are used to pay for qualified health care expenses. At age 65, you can take distributions from your HSA for any reason without penalty.
Financial Planning Is Crucial
Financial evaluations should be an ongoing part of your planning. Why? Because your economic situation may change from year-to-year, especially in the post-COVID world we are experiencing today. You may be unable to save as much one year as you could in previous years. However, you may find additional savings are possible. Careful evaluation of your lifestyle, spending habits, and other factors may show you can save more than you think.
Adjust Your Lifestyle Today to Fit Tomorrow’s Needs
Your financial evaluations help define areas you can adjust to help you save for retirement. For example, downsizing your current home can decrease your monthly mortgage payment. Giving up annual vacations for a few years can provide extra money for retirement. Even small things, such as not dining out frequently can make a big impact on your ability to save.
Plan Your Investments Wisely
Investments in your retirement account or within a personal portfolio require careful planning. You want to maximize your investment income potential within the limits of your financial ability. But, investing within your comfort zone is a key component, as well. With that in mind, you can create a customized strategy to reach your goals within your comfort zone. Riskalyze is a financial planning tool that can help identify the levels of risk you can tolerate comparative to the reward you want to achieve in your portfolio. This tool defines your Risk NumberÒ and can provide a blueprint to your potential success in building the financial security you desire.
Final Thoughts
It can be daunting to figure out if you are saving enough to retire. However, careful planning with the implementation of innovative strategies can help you build wealth to secure your future. It takes commitment, continual evaluation, and dedicated oversight to stay on track. But with the proper knowledge, tools, and professional guidance you can do it.
This article was written for informational purposes only and should not be construed as legal, financial, or investment advice.