How much money do you need to retire? When calculating the amount, financial planners often suggest you'll need 70% of your pre-retirement yearly salary to live comfortably. What comfortable means to you may vary, depending on whether or not you have paid off your mortgage and are healthy without extra medical costs. If you plan to travel, build a new home or get involved in an expensive hobby, your cost of living may rise in retirement.
If you are living on 70% of your pre-retirement funds, you will generally need $15 to $20 in savings per dollar of the annual shortfall between expenses and your income. A good way to view the future is to estimate how the expenses in your life will change once you retire. If your projected expenses exceed pensions and Social Security by $20,000 a year, a nest egg of $300,000 to $400,000 would be needed. Use a projected retirement expense calculator to estimate your costs in retirement.
Financial planners often recommend you save 10% to 15% of your income for retirement, beginning in your 20s. Using an online calculator, you can figure out how much to accumulate and how much to set aside to reach your target goal.
What about social security and pensions? Unfortunately, in retirement you may need something beyond these funds to survive. Personal savings should be in place and the possibility of a part-time job is another thought, if social security, pension and savings won't pay your bills. If you cannot save enough money now, it is time to cut back. Take money from extras you have in your life (dinner out, that extra coffee trip, etc.) and put the money away in savings.
Working after retirement may be a solution. The job market may be tough as a senior and your choices of jobs available could be limited. Health is also an issue when it comes to working after retirement. Delaying your retirement may be a better choice in this case, giving you an opportunity to put away more money before retirement begins. Working longer until at least retirement age (66 if you're 50 today) helps you delay taking Social Security benefits, which could increase the size of your monthly benefit by 30% or more.
If you are in your 40s/50s, and you haven't gotten started yet on retirement savings, you need to start now. Starting your retirement planning late might make a traditional IRA a better choice than a Roth. Max out your contributions to tax-favored accounts, such as 401(k)s and IRAs. Other options to consider include moving into a less-expensive home, then investing the profits toward retirement, or get equity from your home by taking out a reverse mortgage. Download a free copy of the Department of Labor's guide "Savings Fitness: A Guide to Your Money and Your Financial Future".
Plan ahead before retirement and consider how much income you will have from Social Security, pensions, savings and other sources, in order to calculate how comfortable you will be financially by the time you retire.