LAST REVIEWED Jun 08 2020 9 MIN READ
Saving for retirement takes smart budgeting and willpower. While saving money is important, learning how to manage your retirement savings could be even more essential. After all, this money will be your retirement income when you stop working. Discover more information to help you make sure you have the funds you need when you retire.
Will Your Retirement Income Be Enough to Support Your Lifestyle?
To decide how much money you’ll need to live comfortably and whether you’ll have enough savings to retire, start by estimating your retirement expenses. If you think your income won’t be adequate, you may want to increase your earnings, reduce your living expenses, or both.
People can estimate their retirement expenses in several ways and determine what percentage to save for retirement.
According to FEDWeek, the 80% rule says that most people will need about 80% of the amount of money they spend before retiring. Commuting costs and retirement plan contributions will decrease, and you may decide to conserve cash by moving to a residence with lower expenses. However, costs for travel and health care could rise. Many retirees spend the most money during the first few years after they retire and near the ends of their lives when health care costs increase. Your spending could be above 80% during these times and below it during most of your retirement.
How much money do you need to live comfortably? While future expenses can be difficult to predict, the closer you are to retirement, the more accurate your calculations will be. Consider any large bills you expect, such as more vacations or a home renovation, as well as ways to save money, such as switching to a less costly vehicle or refinancing some of your loans.
How Much Money Do You Need to Retire?
You can also use the 4% rule to find out how much money you need to retire. According to The Balance, this figure is an estimate used by many financial professionals that states 4% is the amount you can withdraw from your retirement accounts every year. For example, if you have $1 million, you can spend $40,000 per year. If you use more money, your savings may not last.
To determine how much money you’ll need in retirement, you can divide your estimated yearly expenses by 4%. For example, someone who needs $50,000 per year may want to save at least $1.25 million, or $50,000 divided by 0.04.
To decide what percentage of income should go to retirement, you may want to use the 10% rule. According to The Balance, this rule states that if you start saving for retirement in your 20s, you should save around 10% of your income every year. If you start saving later, you’ll need more money. Keep in mind that the 10% rule is only a guiding principle; it won’t tell you exactly what percentage to save for retirement. Your expenses and the returns you receive on your investments will also impact the amount you need to save and when to retire.
Common Sources of Retirement Income
People usually get their retirement income from Social Security and pension plans as well as retirement accounts. If you’ve been paying Social Security taxes for at least 10 years or 40 quarters, you can use the Social Security Retirement Estimator to find out how much you should receive from Social Security. What age you retire impacts these numbers, and the estimate will be more accurate for people closer to retirement.
You can start receiving Social Security benefits when you turn 62, but you’ll get more money every month if you wait. When you turn 70, you can get the maximum amount, even if you decide to keep working. Some people may also get payments from a current or former employer that offers a pension, also called a defined benefit plan. You may want to contact your pension plan’s benefits administrator to find out how much money you’ll receive during retirement.
Most Common Retirement Savings Plans
Many types of retirement plans are available. Your retirement savings include everything you have in a 401(k) account, Individual Retirement Account (IRA), health savings account (HSA), and other retirement accounts.
A 401(k) is an employer-provided investment account.
An IRA is a retirement account maintained through a bank or investment company.
An HSA lets you save for future medical expenses tax-free.
With a traditional IRA or a 401(k), you must start withdrawing a minimum amount called a required minimum distribution (RMD) when you turn 72. Roth IRAs don’t have RMDs, and many people use these accounts to pass their savings on to their heirs when they die. However, you can start withdrawing funds with no penalties when you turn 59 1/2. If you have a 401(k), including a Roth 401(k), or a 403(b)s RMDs are applicable to you.
Will Your Retirement Income Be Enough to Meet Your Needs?
You may be asking, “Can I retire?” If your yearly income during retirement will exceed your predicted expenses, you probably have enough saved. If you think you might fall short, you can work for a few more years, start saving more of your income, create a target retirement income fund, reduce your spending, or choose investments with higher rates of return. You may want to estimate your retirement income and expenses so that you can prepare for retirement.
Saving vs. Investing
Many people think of saving for retirement as the same as saving for an emergency. However, this view can result in lower returns and account balances. When people put away money for a vacation or unexpected expenses, they use saving accounts, CDs, and other types of accounts that offer low risks but have low potential gains. When you’re saving for retirement, you may want to invest in accounts with higher risks and larger potential rewards. Since your retirement could be decades away, you’ll have plenty of time to weather fluctuations in the market and let your investment grow.
With a 401(k), people don’t have to pay taxes on their retirement accounts until they start withdrawing money. Since they won’t have to pay federal taxes on retirement income from interest until they use it, their money will have a chance to grow in a tax-free manner.
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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 education, and integration with leading payroll providers.