Decoding Your Magic Number for Retiring Comfortably

Roughly 41% of Americans believe retiring financially secure is “going to take a miracle,” according to a recent report from the Natixis Global Retirement Index. Overall, 59% of Americans said they accept that they will have to keep working longer before they’re prepared financially to retire, while 36% believe that they will never have enough money to be able to retire.

How do you feel about your chances of retiring comfortably? Will you be able to maintain your current standard of living, or are you concerned you’re going to need to make significant sacrifices to reduce expenses?

These are important questions that keep a lot of people up at night. But before you can evaluate if you’re going to have enough money at retirement, you first need to estimate what that figure is for your particular situation.

Your Specific “Magic Number”

Unfortunately, there’s not a one-size-fits-all number that works for everyone. Just as income varies from person to person, so do living expenses.

To assist you with calculating your realistic retirement fund accumulation goal, follow these three basic steps:

Step 1: Estimate your total annual living expenses at retirement. A good rule-of-thumb is that a typical retiree will need 80% of their pre-retirement income to maintain the same standard of living when they permanently leave the workforce.

For example, let’s say Gina’s annual income is around $100,000. For Gina to maintain her current standard of living, she needs to plan for using $80,000 each year in retirement.

This number is 20% less because she’ll no longer need to save a percentage of her income for retirement. Gina also won’t have some of the expenses she had when working, including her commute, business wardrobe, etc.

If you are in the early stages of your career, inflation will cause you to need more cash, so while 80% is a good starting point, any more would be even better. Additional growth and interest earned on your retirement funds may offset some of this, but we can’t assume it will all be.

Step 2: Calculate your estimated net annual living expenses. Subtract your expected Social Security benefits and any pension income you expect to receive from your estimated total annual living expenses in Step 1.

If Gina expects to bring in $20,000 per year from Social Security, she’ll require an additional $60,000 per year to reach her estimated need of $80,000.

If you don’t know what your expected Social Security benefit will be, you can get it from your most recent Social Security statement, which you’ll find on the Social Security website.

Step 3: Multiply your net annual living expense number from step 2 by 25. That number is the amount of money you’ll need to save for retirement.

In Gina’s case, she’d multiply $60,000 by 25 years to realize she needs $1.5 million at retirement to maintain the same standard of living for 25 years of retirement.

Determining a Retirement Annual Budget

Now that you know these three easy steps to get your retirement ”magic number,” you also need to know about The 4% Rule. This rule recommends that you withdraw no more than 4% of your retirement savings per year to fund your retirement for at least 30 years.

The 4% Rule is a good guideline to estimate an annual budget for retirement, but it’s not the only way to arrive at that figure. A financial advisor can be beneficial here as well.

How Much Money Should You Set Aside for Retirement Each Month?

This number is also going to be different for every person. Your current age, the age at which you want to retire, and how much money you’ve already saved are all relevant factors.

Many financial advisors suggest investing 15% of your gross annual income for retirement. This may seem like a daunting number, but it can become a way of life once you make this commitment and any budgetary adjustments necessary. The hardest part is getting started, but remember that you’re paying your (future) self here, so the importance couldn’t be any greater.

Of course, if you’re starting to save for retirement well into your career, your percentage would need to be greater to make up for lost time.

Other Sources of Retirement Funds

If you have a retirement plan at work, like a 401(k), and your employer matches a percentage of employee’s contributions, contribute at least that amount and receive the “free money” your employer is putting into your account every pay period.

If you don’t have a retirement plan where you work, a Texell representative can help you set up a Roth IRA as your personal retirement savings account.

Texell is here to help you save for your future. Use our Roth IRA calculator to illustrate various saving scenarios and how each of those could play out over time.