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The general rule of thumb is that you’ll spend about 80% of your current salary in retirement. Read on to find out what that means for your retirement planning.
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Putting a portion of your salary aside every month into a retirement account isn’t exactly easy sometimes, especially with inflation at elevated levels and housing costs up significantly compared to just a few years ago.
It doesn’t help that it could be difficult to calculate how much you’ll need in retirement, considering that no two retirement plans will look exactly the same.
But there are a few tried-and-tested approaches to coming up with a general amount you’ll need. So let’s take a look at how much you may want to save to maintain your current standard of living if you’re making $30,000 per year.
Consider the 80% rule
Most financial experts say that you’ll spend about 80% of your pre-retirement income to maintain the same standard of living in retirement. It’s not an exact science, of course, but it’s a good starting point to estimate the amount you’ll need.
So, if your annual income is $30,000 right now, then 80% of that is $24,000. This is roughly what you’ll spend to maintain a lifestyle similar to the one you have right now.
Deduct what you’ll get from Social Security
Most Americans are able to collect Social Security while they’re in retirement, so we should factor this into our equation as well. The general rule is that Social Security benefits replace about 40% of pre-retirement income.
With $30,000 in annual income, that means you could receive an estimated $12,000 per year in Social Security payments, without adjusting for inflation. Remember though, that this is a rough estimate. You can use the official Social Security calculator to enter your age, salary, and target retirement year, to get the most accurate estimate for you.
So if we take our previous $24,000 and subtract $12,000 from annual Social Security payments, then we end up with a remaining $12,000 that you’ll need each year.
How much you need to save
And finally, if we multiply that $12,000 by 25 (the estimated amount of years you’ll be retired), then we come up with a figure of $300,000 needed for retirement savings.
It’s worth repeating that this is just a hypothetical estimate and doesn’t include inflation-adjusted figures nor does it account for your specific lifestyle.
Start investing as soon as possible
No matter how much money you’ll need for retirement, putting money into a retirement account as quickly as possible is always the best strategy.
One good way to do this is to sign up for your company’s 401(k) program, if one is offered. And if your company offers contribution matching, make sure to contribute enough to qualify for the maximum match amount so that you can take advantage of free money added to your account.
You may also want to consider opening up an individual retirement account (IRA). You can do this through a stock broker, which will allow you to make your own investment decisions. You’ll also be able to choose whether you want a traditional IRA or a Roth IRA. Both have tax advantages, but the Roth IRA will allow you to make your retirement withdrawals tax-free.
These are just estimates
Remember that these are just estimates, and the amount you need in retirement may look very different. But this should give you a few ideas of how you should think about retirement planning and how much you might need to put into an investment account each month.
And remember that the longer your money is in a retirement account, the more potential you give it to grow. Time is your friend when it comes to compounding interest, so the sooner you start saving, the better.
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