Whether you plan to spend your retirement years traveling, starting a new part-time career or visiting your grandchildren, you’ll need money to ensure security.
But the question is – how much?
Most financial planners say you’ll need 70 percent or more of your current income to retire comfortably. In other words, if you’re making $60,000 a year now, you’ll need about $42,000 a year when you retire, just to maintain your current standard of living.
The ongoing Georgia State University RETIRE (Retirement Income Replacement) project, conducted for the federal Department of Labor, looks at the income requirements of households before and after retirement at three-year intervals. In 2004, the project found:
- A single-earner couple making $30,000 annually needs 84 percent of that income, or $25,200 a year, after retirement.
- A $50,000 to $60,000 single-earner couple needs to replace 79 percent of their pre-retirement income, or $39,500 to $47,400 a year.
- A $90,000 single-earner couple needs to replace 82 percent of pre-retirement income, or $73,800 a year.
- A two-income couple needs to replace 84 percent of $30,000 a year pre-retirement ($25,200), 77 percent of $50,000 ($38,500) and 78 percent of $90,000 ($70,200).
In general, you can expect your expenses to go down in retirement. That’s because you won’t have to drive to work, buy expensive business attire or eat lunch out. And by then, your home likely will be paid off and your children will be launching out on their own.
On the other hand, some specific expenses may increase – for instance, spending on leisure-time activities such as golf and travel. Your health care costs, and the possibility that you may need long term care of some kind, also are likely to rise. And of course inflation will continue to erode your dollars.
Social Security will provide you with a percentage of what you’ll require to retire comfortably, according to the RETIRE project. For example, RETIRE estimates that Social Security will replace 43 percent of the income earned by the single-earner couple that makes $60,000.
That means they will require another $21,000-plus annually. Factoring in inflation and a conservative rate of return, they’ll need a $500,000 nest egg to generate that amount for the 30 to 40 years they may live after retiring.
The total amount you’ll need to save, along with how much you need to put away every year to reach that goal, depends on many factors. They include the length of time you’ll be retired; your lifestyle; whether you want to help your children or grandchildren financially; your health; inflation; your tax bracket; and your investment return.
That’s where careful budgeting comes in. It’s wise to start doing the math early, to figure out how much you’re spending now, what your expenses will be when you retire, and how much you need to save to get you there.