If you are like many workers, you probably dream of the day when you’ll be able to leave the grind and start living your retirement dreams. Whether that means spending more time with loved ones, traveling, or rediscovering your love for a hobby, living in retirement comes with a cost.
If you’ve been diligent about setting aside funds in a 401(k), IRA, Roth IRA or other retirement savings vehicle, you probably wonder when you will have accumulated enough funds to retire. Unfortunately, there isn’t a magic number that pre-retirees can go by; the amount you will need will depend on your personal situation. Learn more below about how to analyze the adequacy of your retirement savings.
Step 1: Evaluate Your Current Savings, Pension Income, and Social Security Income
The first step in figuring out if you’ve accumulated enough funds to retire is to evaluate what you have. That calculation should include any pension income you are eligible to receive (or that you expect to be eligible for at some point in the future), Social Security, and your own personal retirement savings.
Start by pulling together your most recent quarterly statements for all of your retirement accounts. If your employer offers a pension plan, your company’s benefits department should be able to provide you with current plan information.
You should also factor in your anticipated Social Security retirement income. The Social Security Administration has an online retirement estimator designed to provide estimates based on your earnings record.
Step 2: Estimate How Much Money You Will Need in Retirement
This step can be relatively easy if you are working with a financial advisor or financial planner, as they can help you crunch the numbers. If you are not working with a financial professional, make your calculations using a variety of helpful retirement calculators online.
Determining how much money you will need will largely depend on your anticipated lifestyle in retirement. Have you planned for out-of-pocket health care expenses and potential future long-term care expenses? Will your housing and living expenses be higher or lower than they are today? If you are considering relocating, look into what your cost of living in the new location would be.
You should also estimate how long you will need your retirement dollars to last. Many financial professionals use 30 years as the goal. This number is important because you’ll need it to determine at what age you can consider retiring without outliving your retirement savings.
Many financial professionals estimate that you should be able to comfortably take 4 percent of your retirement savings every year, with a reasonable likelihood that your savings will last for at least a 30-year period. Put more simply, if you’ve managed to save $1 million, your investment portfolio may be able to tolerate annual withdrawals of $40,000 each year for the next 30 years. Remember to add your anticipated monthly pension and/or Social Security income to your savings total to determine your potential monthly retirement income.
Step 3: Make Realistic Adjustments to Make Retiring a Reality
If your analysis shows that your retirement savings aren’t quite where they need to be yet, don’t panic. First, you’re not alone. According to Bankrate, 22 percent of Americans cited not saving enough for retirement as their biggest financial mistake.
Identifying a shortfall in your retirement savings simply means that now is the time to take deliberate action and make adjustments to make your future retirement more of a reality. It’s also important to remember that your retirement-readiness can—and likely will—change over time. You should re-evaluate your numbers each year.
For many pre-retirees, this is a wake-up call of sorts and can involve redefining what your retirement will look like. Maybe that means scaling back on planned travel, or downsizing. It could also mean delaying retirement for a year or two to continue accumulating savings.
If you are not taking full advantage of your employer’s 401(k), 403(b), SIMPLE-IRA, or other employer-sponsored retirement plans, there’s no time like the present. Taking advantage of the full amount (if any) of your employer’s match can be a powerful way to help your retirement dollars accumulate faster.
When preparing for your retirement years, the best approach is to start saving as much as possible, as early as possible. It never hurts to get help from a financial professional who can review your goals and help you develop a plan to achieve them. Monitor your savings and investments over time, and adjust them as needed to help you stay on track to meet your retirement dreams.