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Making a quick assessment of your retirement savings needs is tricky. Check out an approach that could be the way to go.
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You need to have at least some retirement money in a brokerage account or dedicated retirement savings plan if you want a comfortable life as a senior. The sad reality is, Social Security is only meant to replace about 40% of pre-retirement income, and you’re going to need to replace about 80% or more. That means the rest is going to have to come from your savings.
But how much do you need saved so you can have a secure retirement? Figuring that out may seem complicated, but there’s a quick shortcut you can use.
A simple way to estimate your retirement savings needs
Here’s a fast, easy way to determine the amount you’re going to need to save for retirement: Assume you’re going to need 10 times your final salary. So if you expect to be making about $80,000 when you retire, you’d need $800,000 invested for your future.
If you’re a long way away from retirement, your final salary will probably be more than you’re making right now. But you can get a good idea of what it will be by adding 2% to your salary each year until retirement. For example, let’s say you’re making $50,000 right now and are 10 years away from retirement. Here’s what that would look like.
Based on this calculation, you’d need to have around 10 times your ending salary of $59,754 or about $597,540 saved for your future. If you did that, and you followed the 4% rule, which says to take 4% of your balance out in your first year of retirement and adjust for inflation each year thereafter, your retirement balance would give you about $23,910.00 per year.
That’s just about 40% of your pre-retirement income, so when combined with the 40% Social Security replaces, you’d be in good shape.
How to make sure you hit your savings goals
Having an easy way to estimate your retirement nest egg is the first step. Next, you need to make sure you’re actually saving enough money to hit this target. To do that, it’s helpful to break big goals down into small ones.
For example, if you need a $597,000 retirement nest egg, you could use the calculator at Investor.gov to figure out how much to save each month so you ended up with that amount. To find out your monthly savings target, you’d input:
Your current savings balanceYour desired ending amountYour projected rate of returnThe number of years to retirement
As soon as you know how much to save each month, set up an automated transfer of that amount into your 401(k) or other tax-advantaged retirement plan. Your money will be invested automatically, your nest egg will grow, and you’ll hopefully find yourself ready to retire with the cash you need to live in comfort during the later portion of your life.
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