How Much Average Retirement Income do you Need in USA? - Retirement Planning

No matter how much you save or invest throughout your life, your retirement savings are limited, so you should use them optimally. The chances of working after retirement are scant. Even if you find a way to earn money, you may not be able to work for long due to increasing age, low energy, and health complications. In addition to this, you may miscalculate your nest egg, assuming that your retirement expenses would be relatively lower than your pre-retirement expenditure. However, you should account for factors such as consumer goods inflation, medical inflation, financial emergencies, travel, children’s needs, etc., when saving for retirement.

That said, when it comes to planning for the future, a number of things can go against you. Inflation is undoubtedly the first thing that can render your money worthless or worth a lot less than what it is now. The U.S. is going through one of its worst inflationary periods at present. With inflation crossing 8%, retirement accounts have suffered a significant blow. Further, after the pandemic, the stock market crash, and now the Ukraine and Russia conflict, the effect of these events has been felt across portfolios. Taxes can also take a toll on your savings. If you do not estimate your future tax liability and use tax-advantaged accounts smartly, you may end up losing a considerable portion of your money to tax. Besides, you may have financial emergencies as well as healthcare expenses. The present generations are far more susceptible to suffering from illnesses due to pollution, sedentary lifestyles, stress, and other similar factors. While being optimistic is good, planning for the worst is equally crucial. If you wish to secure your financial future, do consider consulting with a professional financial advisor who can guide you on the same.

This brings the question of how much you need to retire and if there is such a thing as the right retirement income. There may not be a direct answer to this, but the following things can help. Keep reading to know more.

What are the different retirement income sources I can rely on?

There would be a number of retirement income sources for you, provided you save optimally. Typically, retirees draw their income from retirement accounts like the company-sponsored 401k account. If you have been saving in an Individual Retirement Account (IRA), you may also have that to rely on. Investment returns like mutual funds, stocks, bonds, etc., also account for a significant chunk of your money in your golden years. Further, Social Security benefits, although not sufficient on their own, can considerably add to your retirement income when taken along with other investments mentioned above.

If you are wondering how much can I earn on Social Security benefits, here are some things you should know:

If you withdraw your Social Security benefits as of August 2022, you will receive the full benefit of $800 per month or $9,600 per year after you have reached the full retirement age. This is independent of your overall earnings.
If you are under the full retirement age in 2022 for the entire year, the Social Security Administration (SSA) will deduct $1 from your benefit for every $2 you earn above the annual limit of $19,560.
If you reach the full retirement age in 2022, the SSA will deduct $1 from your benefits for every $3 you earn above the annual earnings limit of $51,960.

Other than Social Security benefits, you must also account for your retirement accounts. These accounts will be taxed differently in retirement, depending on their type. Roth accounts will be exempt from tax in retirement, whereas traditional accounts will be taxed. So, if you have a traditional 401k or IRA, you must save, keeping the tax output in mind. If you have had a traditional account all your life but plan to convert to a Roth account, you would still owe taxes on the conversion. If you are nearing retirement, this could uproot your savings and create a dent in them. Moreover, you cannot withdraw your funds from a converted account for the next five years from the date of the conversion without incurring a 10% penalty. So, you would have to be mindful of that too.

How much money do I need for retirement?

According to the U.S. Census Bureau, the median average income in the USA after retirement for someone aged 65 or above is $47,357. The mean average retirement income for the same age group is $73,228. The average income by age typically decreases as you grow older. So, the median average retirement income for ages 65 to 74 is $56,632, and the mean is $84,153. Over the age of 75, the median retirement income is only $37,335, and the mean is $58,684.

These averages have been found appropriate for the retirees in America at present. If you are nearing retirement, you may take them into consideration and plan your nest egg accordingly. However, if you are way back, you may need to look past them and add inflation and other factors to your calculations. Apart from the cost of living, there could be several other changes in the future. The shift to electric cars from fuel, etc., are all likely to materialize for good in your lifetime. The general attitude and relevance of financial security are also changing. More and more people are now opting to retire early in their 40s and 50s instead of working well past their 60s. It is crucial to evaluate your goals and understand how you see your life unfolding before you can dive into retirement planning.

What is a good monthly retirement income?

While the ideal average retirement income can only be calculated according to your unique goals and lifestyle needs, some rules and strategies have been in practice for some years and have helped investors plan for their future expenses. Here are some of them:

1. 4% rule:

You can follow the 4% rule that states that you can comfortably withdraw 4% of your retirement nest egg each year. So, if your yearly expenses are $60,000, you would need a retirement nest egg of $1,500,000. This way, you can easily withdraw the required amount for your annual expenses.

2. Saving 15% of your annual pre-tax income:

Some financial experts recommend saving at least 15% of your annual pre-tax income. This rule is calculated on the assumption that your income will increase every year, and so your retirement savings will increase in tandem with your income. However, you would have to save additionally for the years you do not work or earn less than you usually do. Otherwise, you may end up with a smaller retirement pool.

3. $1000 rule:

The $1000 rule was created by the Certified Financial Planner (CFP), Wes Moss. According to this rule, you need to save a minimum of $240,000 for every $1000 you need in retirement. However, this rule is only applicable if you are planning a retirement of 20 years. If you live longer, you would likely end up exhausting all your savings and would have to depend on others for your needs. In addition to this, this rule is not conclusive of inflation. So, the value of $1,000 will likely not hold in your retirement.

4. Saving at least 75% of your pre-retirement income:

Apart from the rules mentioned above, a lot of financial advisors recommend having an average yearly income in the U.S. that is at least 75% to 80% of your pre-retirement income. Retirement expenses may drop a bit post-retirement, so such a sum is sufficient to cover most needs. You may save more if you feel the need to. However, keeping a minimum target of 75% can also be enough to start your planning with.

How to ensure a financially secure retirement?

Here are some things you can follow to ensure a financially secure retirement:

1. Start saving early:

When you start saving from a young age, you have the advantage of time. Your investments compound better, and you have a longer investment horizon to outride volatility, reduce risk, overturn losses, make amends for any errors in calculation, etc. You have a better chance of accumulating a bigger retirement savings pool, and the burden of saving for the future is reduced. As opposed to this, if you start saving at a later stage, you would end up feeling more pressured to make up for the loss of time and opportunities. Your investments would have less time to compound. If you have a 401k retirement account, the number of years you contribute your money would be less, and so would be the matching contributions from your employer. All of these things together impact your future retirement security and comfort.

2. Maximize your retirement contributions:

Maximizing your retirement contributions to accounts like the 401k and the IRA can ensure steady growth over the years. The Internal Revenue Services (IRS) sets the contribution limits for retirement accounts every year. For 2022, it is $20,500 per year with a catch-up contribution of $6,500 if you are 50 or older. For an IRA, it is $6,000 with a catch-up contribution of $1,000 if you are 50 or older. Most employers provide a 401k account. So, if your company offers you a 401k, one of the first things you do can be to maximize your contribution to it. If your employer matches your contribution, you will be able to get a dual benefit. If your company does not offer a 401k, you can get yourself an IRA. Even though the contribution limits for an IRA are relatively lower, you can still make up a considerable savings pool if you invest in the account diligently. An IRA can be opened with a bank, a union, a broker, etc. When selecting any of these accounts, it is also essential to be sure of your present and future taxability and choose between the Roth and traditional versions accordingly.

3. Be consistent:

Retirement planning is a long-term process. It starts early and practically goes on for the rest of your life. You cannot ignore planning for your retirement. Considering the fact that your retirement can last up to 30 years, and maybe more, it can almost be as long as your working years. Moreover, this is a time when your savings would be limited, and you would have no other source of income for your needs. Working can be beyond your capacities beyond a certain age. So, saving optimally is critical. One of the ways this can be achieved is by being consistent. Financial discipline can go a long way. If you are able to maintain uniformity in your savings rate, you can slowly but steadily amass a lot of money. So, do not underestimate the power of discipline and stay put the entire journey.

4. Plan your retirement withdrawals:

It is crucial to plan your retirement withdrawals wisely so you can enjoy a comfortable life in the future. Taking out all your savings at once can trigger a high tax rate. In addition to this, if you withdraw most of your money in the early years of retirement, you can lose a considerable chunk in the beginning and have nothing left for the later years. Running out of money or having a tiny nest egg for the later years of retirement can be a source of stress. It can also force you to live a restrictive and compromised lifestyle. So, try to plan your withdrawals sensibly and always have an emergency fund for financial emergencies. This can start by delaying your Social Security benefits to increase your paycheck. If you have a Roth account, you would not have mandatory required minimum distributions (RMDs). So you can choose not to withdraw your money unless absolutely necessary. This can also help you pass on some funds to your beneficiaries tax-free.

To conclude

Knowing how much do you need to retire depends on the kind of life you foresee for yourself. This can be decided on the basis of your goals, lifestyle, expenses, health, age, etc. A clear picture of your requirements can help you plan better. So, instead of planning ambiguous goals, make quantifiable targets instead. This can help you track your progress and understand your shortcomings.

A lot of people also benefit from hiring a financial advisor. So, you can get in touch with a professional in your area to understand the right average retirement income that can suffice your needs. Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.

For further information on creating a suitable retirement plan for your unique financial requirements, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.