Statistics Say: This is How Much Money You Actually Need to Retire - Latest Global News

Statistics Say: This is How Much Money You Actually Need to Retire

If you’re looking for a retirement savings goal, you may need to change your approach slightly to get the best possible result. Using a few established rules, you can determine how much money you need to comfortably exit your career. Use these rules to develop a winning strategy tailored to your circumstances.

Personal circumstances play a big role

Many people want a magic number for setting ambitious savings goals. It’s intuitive to monitor account balances to find out if you’re hitting key milestones. Balances are a handy scoreboard.

This is a flawed approach in most cases. Financial planners disagree about the magic number. Retirement goals and cash flow resources can vary significantly from household to household. The cost of living can be significantly higher in some places, changing the basic requirements for making ends meet.

People with more comprehensive Social Security benefits may bear fewer personal burdens than others. Retirees with defined benefit pensions also have different savings requirements. Lifestyle requirements also vary greatly from person to person, so there are not even uniform financial requirements for retirees. These variables make it impossible to determine a target amount that will be a valuable guideline for everyone.

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Fortunately, there are several generally accepted methods that allow you to reliably estimate the amount of assets to be satisfied your personal retirement goals. This requires a few extra steps and effort, but is a helpful exercise in creating a plan with measurable progress.

Estimating your cash flow needs

Cash flows are just as important as assets when it comes to retirement planning. Ultimately, your basic requirement is to replace the earned income that you lose when you leave the workforce. Once you know your cash needs, you can estimate how much money is needed to meet those needs.

Three different retirement planning arrangements can help you close this gap:

  1. For a seamless transition to work, you will need to replace approximately 80% of your pre-retirement income.

  2. Your savings should be at least 10 times your annual retirement income.

  3. According to the 4% rule, you can safely distribute 4% of your pension assets every year without your financial resources being exhausted prematurely.

These are three different ways to think about solving the same problem: How can you make sure you can meet your needs without losing your money? The first step to applying the above rules is to determine your cash needs. If you can live with the bare necessities, you’ll need to exceed the federal poverty level by about $20,000 for a household of two.

People often have more ambitious financial goals, so most households have greater cash needs. The average household income for pre-retirees is currently about $80,000. So, according to the first rule above, the average retiring couple will need an annual income of about $65,000 to seamlessly maintain their lifestyle. Wealthier households would need even more cash to avoid changing their lifestyle.

After you figure out how much cash flow you need, you can identify sources of income that will offset the burden of your investments. Most people are eligible for Social Security retirement benefits. The average benefit is around $21,600 per year, although some people can expect to receive almost $60,000 from the system each year. If you have a defined benefit pension, you have a guaranteed income through this plan.

After deducting these and all other sources of retirement income, the gap remains that must be covered by distributions from the retirement savings assets. In this step, the second and third rules listed above become important.

Consider a hypothetical household with an average pre-retirement income of $80,000 and assume that they expect to receive the average monthly Social Security benefit of $1,800. The second rule states that this household would need $800,000 to $1 million to seamlessly maintain their standard of living in retirement. The 4% rule suggests that the same household would need to save $1.06 million. This assumes that the first $21,600 is covered by Social Security, meaning they will need an additional $42,400 in annual distributions from retirement accounts to reach 80% of pre-retirement income.

As you can see, the three rules above may lead to slightly different savings goals, but they will help you safely estimate an approximate value. This process is supported by decades of observations of millions of people. Everyone’s circumstances are different, but $250,000 should represent the low end of your wealth-building goals. Most households should aim for $1 million to comfortably maintain their lifestyle without facing excessive longevity risk.

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Statistics Say: Here’s How Much Money You’ll Actually Need to Retire was originally published by The Motley Fool

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