What is a Good Monthly Retirement Income?
Life in retirement can be laid back. You do not have the hustle-bustle of commuting to work every day. Expenses on socializing, travel, eating out, clothes, shoes, etc., substantially drop as your professional and personal commitments lower. You may not have to pay for the $3 coffee on your way to work daily, but you will have other financial concerns like healthcare, long-term care, home repairs, renovation, etc. In addition to this, you would also not have a salary being credited to your account every month, but you would have your carefully stacked savings.
Your retirement savings can get you through retirement comfortably, provided you start saving early in life and are consistent with investments in your pre-retirement years. However, using this corpus effectively can be tricky when the time comes. Most retirement planning guides talk about saving enough money for your golden years. Yet, while you amass a large corpus, it can be hard to ascertain the amount of money you should be drawing every month to last a lifetime. Miscalculations or misinterpreting your financial needs can create an imbalance in your retirement plan. For instance, if you draw too much, you may run out of money in your later years. Likewise, if you skimp in your initial retirement years, you may not get to enjoy your wealth optimally, and your hard work may ultimately go to waste. Therefore, striking the right balance is essential, and this can be done if you know precisely how much to save for retirement according to your life expectancy, financial needs, and responsibilities. If you need help with coming up with a financial plan for retirement and ascertain how much you need to save for retirement to live comfortably in your golden years, reach out to a professional financial advisor who can guide you on the same.
The average retirement income can differ for everyone. However, the following factors can be helpful in determining the answer to "how much do I need to retire?"
How much money do you need to retire?
U.S. Census Bureau data states that the median average retirement income for a retired individual aged 65 or more is $47,357, whereas the mean retirement income is $73,228. The median average retirement income for people between the ages of 65 and 74 is $56,632, while the mean retirement income is $84,153. Lastly, for those over the age of 75, the median retirement income is $37,335, and the mean is $58,684.
These figures may help someone who is retiring right now but may not be so accurate for someone retiring in the distant future. The pandemic and global unrest following the Russia and Ukraine war have largely affected economies all over the world, bringing inflation to an all-time high. In March 2022, the U.S. experienced the highest inflation rate of 8.4% in 41 years. In 2019, before the pandemic had hit the globe, the inflation rate in the country was just 2.3%. An income of $73,228 can serve you differently during different inflationary periods. Moreover, your unique needs and wants may also be different from your peers. So, these figures may not be 100% accurate and cannot be taken as the sole guiding factor when calculating your retirement necessities.
Most financial advisors recommend saving at least 75% to 80% of your pre-retirement income to suffice your requirements post-retirement. This can be an easy target for most people and also be sufficient to maintain a similar lifestyle as you did before retiring. Your expenses like food, electricity, gas, clothes, etc., are more or likely to stay the same. However, you would no longer be saving for your retirement as you did before. Further, retirees may socialize less and spend less on non-essential items. These changes are organic, and you may witness them as you age. So saving at least 75% of your income is a decent target to aim for. However, you may consider factors like your total income, age, health concerns, debt liabilities, etc., to ascertain the precise goal for your retirement.
In addition to this, keep in mind that apart from your savings, you would also have Social Security benefits in retirement. These can amount to a good chunk of your retirement income. In the case where both spouses are earning, you would have double benefits to depend on. Spousal income can play a crucial role in retirement planning. It is essential to consider your retirement income as the household income, not your individual income. Couples share most expenses. Irrespective of whether one person stays in the house or two, the electricity bill, maintenance costs, home loan repayments, etc., are likely to be the same. What makes a more significant difference here is the fact that two people are bringing home money, and you have two retirement pools to depend on and not one. So, when accounting for how much do you need to retire, try to use a retirement calculator for couples and then start planning.
How to save for retirement?
While there is no absolute figure for retirement that can serve as a road map for all people, some tips can help most retirees. Here are some things you can consider when determining how much you should save for retirement:
1. Use a 401k) retirement account:
A lot of people feel they need to go above and beyond the basics of retirement planning, but many a time, it is the basics that can offer the maximum rewards. A 401(k) is one of the most useful and basic retirement tools that you can use to plan your retirement. The biggest advantage with the 401(k) is the employer match that helps you reach your target sooner. Schwab Retirement Plan Services found in a survey conducted in 2020 that the average 401(k) saver has a goal of $1.9 million to retire. This can serve as a roadmap for how much to save for retirement when planning your future needs. However, you must add factors like inflation, changing lifestyle needs, etc., and then set your target. One of the best strategies here can be to maximize your retirement contributions. The internal revenue services (IRS) sets contribution limits for retirement accounts like the 401(k) every year. For 2022, the limit for those below 50 is $20,500, and those aged 50 over, $6,500 + $20,500 = $27,000. Contributing up to the maximum can speed up your savings progress. Moreover, since a 401(k) also accepts employer contributions, you can benefit greatly for every dollar that your employer matches to your contribution.
Further, since a 401(k) is a tax-advantaged account, you also get to save money on tax. You can choose between a traditional and a Roth account depending on your income now and what you expect your average retirement income to be in retirement. A Roth account is not taxed in retirement when you withdraw your money. However, you pay tax now. On the other hand, with a traditional account, you do not pay any tax in the present, but your withdrawals would be taxed. As a result, traditional 401(k) accounts also have mandatory required minimum distributions (RMDs) from the age of 72. So, make sure to take a call accordingly.
2. Use a realistic retirement calculator:
Computing things can be tricky, which is why using a calculator can be extremely helpful. Retirement calculators help you plan for your retirement with much more accuracy. They consider factors like inflation, changing interest rates, potential market fluctuations, etc., and then give you an estimate of how much you should be saving for your needs. A retirement calculator can help you create a foolproof plan. However, it is vital to use the tool carefully. For instance, enter your present and retirement age accurately. If you are not able to stick to the savings rate as recommended by the calculator, you may not see the desired results. So, try to be as disciplined as possible.
3. Take cognizance of your expenses:
Retirement comes with its fair share of expenses. While you may plan for the obvious ones like healthcare, travel, food, gas, etc., it is also essential to account for the unexpected ones. For instance, apart from your average retirement income, you would require an emergency fund even in retirement, as an emergency can arrive anytime and anywhere. It can rob you of your savings and create a shortage of funds. A crisis in retirement can be more damaging than before. This is because you do not have the means to earn money in retirement as you did in your early years. If you happen to use your savings when you are still working, you can cover up the gap with your next salary or by skimping on your lifestyle for a few months. However, in retirement, you would have a limited pool of money with likely no or fewer opportunities to earn more.
In addition to this, your family members like your spouse or children may need your financial help if they are still dependent on you. So, you would need to plan for their expenses too. If your children are still studying or not settled in their life, you may need to keep aside some funds for their use. If your children are dependent on you due to a medical condition, you would have to buy adequate insurance for them.
It is also important to not undermine the effect of inflation. As stated above, the inflation rate has increased by approximately 6% since 2019. There has been a drastic hike in a matter of just three years. While it can be hard to predict inflation or that such a significant rise will ever present itself in the future, it can help to study the inflation rates of the past few decades and accordingly keep a cushion in your savings to prepare for the worst.
4. Plan according to your unique needs:
The retirement plan of someone living in New York will significantly differ from someone living in Missouri. Every state offers a different living experience and has a different standard of living. Buying a house in New York is higher than in many other parts of the country, and so is the cost of maintenance, commuting, rent, electricity, etc. Your retirement corpus has to be in accordance with the state you wish to settle down in after retirement. If you plan to stay in a big city, you may need a larger retirement corpus to cover the expenses of food, transport, gas, dining out, etc. Recreational activities like joining a club or group, such as golf, pool, card games, etc., also cost more in some cities than in others. Moreover, if your children live close to you, you may not spend much money traveling to see them. However, if they live far, you may pay more to see them every now and then. So, it is important to count these factors when planning your retirement corpus.
Your health will also dictate your retirement needs. You will require a bigger retirement pool if you need long-term care at home. If you lead a healthy life, you may not need to spend as much on healthcare. However, it may still be advised to get a healthcare plan suited to your age. Old age does present health concerns no matter how healthy you are. Moreover, accidents can also put you in physical and financial turmoil. So, being prepared for every possible situation can be an advantage.
5. Work with a financial advisor:
A phase as crucial as retirement planning can require special professional attention. Hiring a financial advisor can be advised given the various factors that can affect your retirement plan. Financial advisors can help you create a well-diversified portfolio that can stand the test of time. Moreover, they can help you navigate through small setbacks like capital losses, market downturns, job losses, financial emergencies, debt, and others that have the potential to stall your economic growth. Hiring a financial advisor may seem like an expense, but in reality, it can be an excellent investment to secure your future financially. Financial advisors can help you plan for your present as well as future financial needs with much more simplicity. This enables you to save time and also money in the long run. However, in order to gain from this arrangement, it is essential to be clear and honest with the professional about your wants and needs and incorporate their advice into your lifestyle and planning without fail.
The average retirement income is a subjective term that can differ for each individual. Therefore, instead of getting tangled in a web of numbers and figures, evaluating your personal goals and then planning for your retirement can be more fruitful. Ultimately, your retirement pool should be able to last you a lifetime and come in handy in the case of an emergency. This can be possible if you start planning and saving from a young age and make timely financial decisions when the need arises. For all other doubts, hiring a financial advisor can be highly recommended.
A financial advisor can help you pick the right investments, save money, and create a budget to stretch your retirement savings. 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.
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. In addition, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
To learn more about suitable retirement accounts for your unique retirement needs and goals, visit Dash Investments or email me directly at firstname.lastname@example.org.
CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.