Retire With More Confidence: Here's How
Are you ready to retire? For millions of Americans, the answer to that question is, "I'm not sure." In order to retire with confidence, the key piece of the puzzle is knowing that your financial needs will be met for the rest of your life. With that in mind, here's a quick guide that can help you definitively know if you're ready to retire with confidence, or if you'd be better off waiting a few years.
Other sources of income
Next, consider any other sources of steady retirement income you may have. If you are entitled to a pension from your current or former employer, you can probably obtain an estimate of how much to expect.
Also, consider any annuities you may have purchased, or any other sources of income you expect. Many Americans' only steady retirement income source is Social Security, so you may not have anything in this category.
The "4% rule" of retirement
After you've added up all of your expected sources of income in retirement, then is the time to worry about your savings.
While it's admittedly not perfect, the "4% rule" of retirement is a good place to start. You can read a great discussion about the rule and its shortcomings here , but simply put, the rule says that you can expect to withdraw 4% of your savings during your first year of retirement and give yourself cost-of-living increases in subsequent years, without fear of running out of money during your lifetime.
In other words, if you have $1 million in savings, this rule says you can safely withdraw $40,000 during your first year of retirement. If the inflation rate is 2% that year, you can increase your withdrawals by this amount for the following year, to $40,800.
Adding it up: How much savings do you need?
Using the admittedly imperfect 4% rule, here are the steps to get a good idea of your retirement number:
- First, figure out how much income you'll need. Multiply your current annual salary by 80% (0.80).
- Divide this amount by 12 to figure out your monthly retirement income need.
- Subtract your estimated Social Security benefits, as well as any pensions or other income sources. This is the amount of monthly income you'll need to produce from savings.
- To apply the 4% rule, multiply this amount by 12, and again by 25. This is your target retirement savings number.
A good starting point
This is a good way to get an estimate of your retirement savings need, and it's certainly better than guessing an arbitrary number like $1 million. However, keep in mind that this isn't perfect, and you may want to adjust this to match your lifestyle, risk tolerance, and desired quality of life in retirement.
For example, if you want to play it safe, you may only want to plan on withdrawing 3% of your retirement savings per year, not 4%. Or, if you plan to travel a lot in retirement or pursue other costly hobbies, you may want to anticipate an income need greater than 80% of your current salary.
The point here is to give you a method to generate a concrete number to aim for that is customized to your life , so that if you reach it, you'll know where your income will come from after you retire and how much you can expect, so that you can retire with confidence.
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