LAST REVIEWED May 05 2020 8 MIN READ
By The Human Interest Team
Saving for retirement can help make sure you can live a comfortable, happy life after you stop working. Without the savings you need, you could have to stay at your job longer or get a part-time job after retirement. Finding out how long your savings will last can help you decide whether you’re contributing enough to your 401(k) or other retirement accounts.
Here’s how you can find out if you have enough money in your retirement savings.
Will your retirement income be enough?
According to a 2019 survey from Schwab Retirement Plan Services, the average 401(k) participant believes they’ll need $1.7 million to retire. Different people will require different amounts because they have varying living expenses; the amount you’ll need could be higher or lower. A United Income report found that only about one out of six retirees have a million dollars. That’s still twice as many millionaire retirees as in 1989.
You may want to estimate your yearly expenses during retirement. Then, multiply that by the average number of years you plan to spend retired. People who retire later or cut their costs will need smaller nest eggs. If your income during retirement won’t cover your expenses, you can also find a way to increase your current salary or place a larger portion of it in your 401(k).
How much do you need to retire?
Many financial advisors use a rule of thumb called the 4% rule or the 4% sustainable withdrawal rate. This is the amount of your savings that you should be able to withdraw every year. Most stocks produce returns of about 7% per year, and inflation is around three percent. That means your real return should be about 4%.
If you keep your withdrawals below 4%, your investment portfolio will help support you for at least 30 years. You’ll also get some income from Social Security. For example, you can withdraw $20,000 per year from a $500,000 retirement account, and a $1 million account will give you $40,000 per year. To find out how much you’ll need, you can divide your estimated monthly expenses by 4%.
If you think you’ll need $50,000 per year to retire comfortably, you may want to save $1.25 million, $50,000 divided by 4% (0.04). You may also want to adjust your withdrawals for inflation. Since inflation is normally around 3%, you might need to withdraw $51,500 in the second year of your retirement. That’s $50,000 multiplied by 1.03. In the third year, you’ll probably need $53,045 or $51,500 times 1.03.
Bill Bengen, an author and certified financial planner in Chula Vista, California, created the 4% rule after researching the returns that retirees received after investing in a balanced portfolio of cash, stocks, and bonds. Since volatile stock markets and low-interest rates could reduce returns and people are living longer than they did in the past, some financial planners suggest withdrawing 3.5% or 3% instead.
According to another rule of thumb called the 80% rule, you’ll need about 80% of your current income after you retire. You probably won’t need to spend as much money as you did on commuting, clothing for work, or retirement contributions, but you may end up spending more on healthcare or vacations. Spending often rises in the first few years after retirement because people have more time to shop and go on trips. It usually decreases in the middle of retirement, and then medical expenses ride near the end.
If you decide to move to a less costly neighborhood or a smaller home after retirement, you can reduce your expenses while increasing your standard of living. That way, you may need less than 80% of your income. However, you could need more money if you decide to renovate your home or travel frequently.
You may want to add your expected Social Security income to the amount you should receive from your retirement accounts. If you’ve been contributing to Social Security for more than 10 years, you can estimate your benefits online.
People who start receiving Social Security benefits earlier won’t get as much per month. You can start getting Social Security at 62, or you can wait until you turn 70. Most people retire and start receiving benefits at 66, and the average Social Security benefit is $1,503 per month. If you also have a pension, you can get an estimate of your monthly benefits from the plan’s administrator.
With a traditional 401(k) or IRA, you can start withdrawals with no penalties when you turn 59½. You must begin required minimum distributions by age 72.
The multiply by 25 rule
After you decide how much money you’ll need per year, you may want to use this estimate to decide the amount you should save. Just multiply the amount you need every year by 25. For example, if you withdraw $40,000 per year, you’ll need $1 million in your account. However, this doesn’t rule doesn’t consider rental properties, pensions, Social Security, and other sources of income.
If you have most of your savings in bonds, CDs, and cash, you may want to use the more conservative Multiply by 33 Rule. With this rule, if you want to withdraw $40,000 per year, you’ll need $1,320,000.
Average retirement savings: Where do you stand?
According to the Government Accountability Office (GAO), 48 percent of people over 55 had no retirement savings. For many Americans, Social Security is the only income source during retirement. However, it was never meant to be the sole income for retired people. The average monthly Social Security benefit is $1,503 per month, only slightly more than minimum wage. Rising levels of debt also keep people from enjoying travel and leisure in retirement.
Human Interest offers full-service 401(k) accounts built for small businesses and their employees. Setup is easy and your company’s plan will be available in 30 to 45 days. For more information, learn how Human Interest works.
The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.