How much do you need to retire?

How much do you need to retire? Have you planned for your future retirement benefits?

According to the U.S Department of Labor data, 60% of Americans have not done any calculation to see how much they need to save for retirement. Due to scientific advances, people now tend to live longer; and due to inflation, the cost of retirement is now higher. Therefore, retirement becomes more costly. 

In a 2020 retirement study by the Transamerica Center, 36% of Millenials, 33% of Generation X and 25% of Baby Boomers worry that they will not be able to afford their family’s basic needs when they retire.

How many years do people spend in retirement?

Data suggests that Americans have longer lives. Americans may expect to live approximately 20 years in their retirement. According to the Social Security Administration, the Social Security benefit has been paid out monthly since 1940. Based on that data, men’s life expectancy has increased over 6 years to the age of 84. The women’s life expectancy  has increased by about 7 years to the age of 86.5. 

For a reference, you can use a life expectancy calculator to have a general idea about the number of years that you will spend in your retirement and plan for your future retirement accordingly. 

How much should you save for retirement?

Experts suggest that you will need 70% – 90% of the income that you earn while you are still working to maintain your standard living when you stop working and retire, according to the Department of Labor. 

For instance, your annual income before retiring is $50,000. Then, you will need $35,000 – $45,000 yearly to support your standard living when you stop working. Let’s assume that you will retire at 62 years and have 20 years in your retirement. Then, you will need $700,000 – $900,000 savings for retirement in 20 years. 

Depending on your own situation, your income and expenses may vary when you retire. Let’s make your own income and expenses statement so that you can have a better idea of how much you will need for your retirement plan.  

How to prepare for retirement

It takes time to achieve financial security for retirement. You need to have plans and make your own commitment and your best effort for it. In order to achieve retirement goals, researchers at Boston College Center suggest that a single person who plans to retire at the age of 65, needs to contribute 10% -17% to his/her savings if that person starts saving at the age of 25. However, if he starts saving at age 35 and 45, he needs to increase the contribution to 15% – 20% and 25% – 27% respectively. 

In order to prepare and save for your retirement, you should have  a basic knowledge of 

sources of your income and expenses so that you can save, build wealth and get ready for your retirement. 

Cost of living

The cost of living varies from place to place. So, It is important to decide where to spend your retirement because you can save a significant amount of money if  you live in a place with lower costs of living. You can figure out the cost of living in the place where you choose to retire.  Make a calculation for your cost of living and plan for it accordingly.

According to Missouri Economic Research and Information Center data,  Mississippi, Kansas, Oklahoma, Alabama, Tennessee, Arkansas, Georgia, Indiana, Missouri and Iowa have the lowest cost of living in the United States in 2021. In contrast, Hawaii, District of Columbia, New York and California are the most expensive states to live in the United States. 

Sources of retirement income

In a 2020 retirement survey by the Transamerica Center, 37% of  U.S workers expect their main income sources of retirement to be from 401k, IRA, and 403b. 13% of workers expect that source to be from other savings and investments. 1 in 4 workers expect their main retirement income to come from their Social security benefits. In 2019, workers saved an average of $50,000 per household for retirement. 25% of workers had under $10,000 saved in retirement accounts. However, 10% of workers reported having no savings for retirement.  

You can decide what your retirement income sources will be. Do not wait, but act soon to plan for your retirement. 

Saving early and investing wisely

It does not matter how much you make, but it does matter how much you can save. A minimalist lifestyle can save a huge amount of money.  A person could make millions of dollars, but spend money on wasteful expenditures  and become broke. However, a different person who made $32,000 annually saved 2/3 of it and invested it for his retirement. So which situation would be considered better?

Savings is good, but it is better if you save and invest wisely. Understand the power of compound growth or exponential growth. Save early and invest wisely. The sooner you invest, the better chance your investment will grow larger. Time is your ally. Invest early and give enough time for your investment to grow. 

Stocks, mutual funds, exchange traded fund (ETF) investments

Nowadays, you can easily own a piece of a corporate stock with $5 savings from a cup of coffee daily. It is even much better that you do not have to pay for fees if you manage to invest by yourself. If you don’t feel comfortable investing in individual stocks, you can start with S&P 500. Also, you can invest in mutual funds and ETFs. In addition, you can get help from a financial advisor. However, you need to do as much research as possible to minimize fees because fees and commission will reduce your investment. 

Real estates investments

Take advantage of leverage to build equity by investing in real estates. Owning a home is the American dream. You can do it. You just need to save as much as you can and build a good credit score so that you can get a good mortgage rate. Then, you can buy your home or rental property and grow your equity. It depends on the economic situation, location and types of home, the house appreciation rate may vary. According to Redfin’s report, the U.S median home price increased 14% year over year.  

You don’t need to be an expert to invest, but you should invest wisely. Let’s make your own incomes and expenses statement. Your income should include earnings from all sources; and your expenses should include all expenses incurred including savings for your emergency fund. Then, you should know how much you can save in order to invest. Always remember to invest wisely. 

Social Security benefits

Social Security is one of the major income sources for retirement. Therefore, you should have a basic knowledge about your Social Security benefits to have a better plan. 

You can start to receive social security benefits at the age of 62. If you do not need it, you can choose to delay receiving the benefits.  Your early retirement benefits will be reduced by some percentage before you reach your full retirement age. However, if you choose to delay taking the benefits up to the age of 70, the amount of your benefit will increase by some percentage up to 8% depending on your year of birth. 

In addition, for your family, qualified members such as your spouse and children may receive a monthly payment of up to 50% of your full retirement benefit amount. Generally, you and your family may receive about 150% – 180% of your full retirement benefit. 

Pension, 401k, IRA benefits

According to  a 2020 retirement survey by the Transamerica Center, 1 in 4 employees is offered pension by their employer. Over 2/3 of employees have 401k plans. You should learn the types of benefits as well as their  rules in order to maximize your benefits. For instance, an employer may offer matching contributions when employees contribute into their 401k offered by the employer. However, there are rules limiting the amount that the employee can contribute; and vesting periods that the employee can vest in a specific period. Moreover, you should take care of your benefits when you quit a job. There are several options which allow you to take care of your benefits when you move to a new job. Choose the best one for your situation.

On the other hand, you can also open an IRA account in which you can contribute $6,000 per year for retirement if your age is under 50 and $7,000 per year if you are 50 or above in 2021. If you want to reduce the cost of investment, you can manage your own investment. Contribute in an IRA and take some tax advantage for your investment growth. You also need to understand the tax implications of IRA withdrawals or distributions as they may eat up your investment. 

Reverse mortgage

If you own a home and have home equity, you can choose to use your home equity and convert into cash. According to the U.S Department of Housing and Urban Development, more seniors choose to take cash from reverse mortgages. However, you must meet certain requirements to qualify for it. For instance, you must be at least 62 or above. The home that you applied for a reverse mortgage needs to be your primary home. Also, you must meet other financial requirements. 

It sounds good to cash out of your home equity. However, you should consider its costs. When you choose to take cash with a reverse mortgage, you will obtain a new mortgage loan. Your mortgage debt will increase and your home equity will decrease. In addition, you will have to pay fees for obtaining a new mortgage loan such as mortgage insurance premium, origination and service fee and so on. Therefore, you should do much research or can consult with a Home Equity Conversion Mortgage counselor before making a decision.  

Hustle business

A side hustle can bring in extra income. It will help to have an extra income source instead of relying on only one source of income. According to the U.S Census data, business applications significantly increased over 66% in 2021 compared to 2020. Due to the Covid-19 impacts on the economy and job losses, people seek opportunities to get a more secure income. There are many options for hustle businesses such as blogs, cooking, organizing, cleaning homes, tutoring, providing services on Fiverr, selling things on Amazon, Shopify, Etsy and so on. Find your time and take the opportunity to convert your skills, hobby or passion into your income sources. 

Other factors that may affect your retirement income. 

Marriage, divorce, children

Marriage makes more sense if you get married to  the right partner. According to the U.S Bureau of Labor statistics, married couples have higher income and are more likely to own a home compared to single people. Spending on food, housing, and healthcare is less expensive for married couples living in the same unit compared to singles. While married couples tend to make higher earnings  than singles. Married couples may also have some advantages in tax and Social Security benefits. 

According to the U.S Department of Agriculture data,  raising a child to the age of 17 can cost over $233,000. Also, your financial situation may be affected when one of the partners has to stay home to take care of your children. Therefore, you should have a strategic plan so that you can raise your child well and also can save for your retirement. In addition, experts suggest that you should save more for your retirement than for your children’s college savings because financial aid may not be available for retirement, but there are college financial aid programs. Put a priority on your retirement because you do not want to financially depend on your children when you get older and retire. 

Nobody wants to face a marriage problem, but it is worth thinking ahead. The cost of divorce may cause a huge financial damage. Therefore, you should know laws that help to minimize the loss; also to protect your benefits and your children’s benefits.   

Questions and Answers – How much do you need to retire

1. Will Social Security benefits be enough to support your living when you retire?

Social Security is one of the main sources of retirement income. Many people mistakenly think that Social Security will cover the entire cost of retirement. However, you may need to have extra sources of income to maintain your standard living when you stop working and retire. 

2. How much should you save for your retirement?

Experts suggest that you need 70% – 90% of your income that you earn while you are working  to keep up your standard living when you decide to stop working and retire. 

The cost of living varies among different places. You can figure out the costs of living where you choose to retire. Also, you can use the income and expense statement above and the Social Security Quick Calculator and  the Retirement Estimator  to estimate how much you will need for retirement and then you can plan for it. 

3. How many years do people expect to live in retirement?

Data suggests that Americans may spend 20 years in their retirement. However, depending on many factors such as personal situation, health condition, family genetics, everyone’s life expectancy may vary. You can use a  life expectancy calculator to have a general idea about the number of years that you may spend in your retirement and make a plan for your future retirement. 

4. How to plan for your retirement?

You should save early and invest wisely. The sooner you invest, the longer time your investment will have to grow larger. You should not rely on one source of income, but have several of them. Keep track of your earnings, spendings and savings. Make plans, make your own commitment and best effort to achieve a financial independence goal and retire when you are ready for it. It takes time, but you can do it.