How much money do I need to retire?
Want to hear a shocking statistic? The median American family headed by a person of retirement age has a mere $12,000 in savings. Due to this, many people are being forced to continue working for longer, putting off retirement for far too long.
If you start saving early with concrete goals, however, you can avoid those mistakes. Take a look at the numbers below—assuming you can reach these goals and practice responsible wealth management in retirement, you’ll be in a much better position to fully enjoy the years ahead.
Assessing Your Income Needs
The first thing you must do is figure out how much yearly income you will need to live the lifestyle you want in retirement. Experts suggest that when doing wealth management for retirement, you aim for 70-80% of your pre-retirement income, but your needs may vary drastically depending on any liabilities, such as dependents or outstanding debt. Sit down and review your expected expenses, budgeting a little extra for surprises and fun. Be realistic about it, but don’t deprive yourself of any long-held dreams (within reason).
Living On Savings
Once you have a goal, next you need a financial strategy to achieve it. This choice can make a big difference for your potential savings. One way you can fund your retirement is to make yearly withdrawals from your liquid savings. This will deplete your savings over time, so it’s important to make sure you have enough money to last your entire expected lifespan. Accounting for time is a huge part of wealth management for retirement. Most experts agree that you can withdraw about 4% of your principle each year without running too much risk that you will outlive your savings (assuming a typical retirement age of 65+). While some risk still remains, it’s a tolerable amount, particularly with programs like Social Security to fill in the gap.
People who are content to live a $20,000/year lifestyle can set their savings goal at $500,000, while people who need $40,000/year or more will need to double that. This path also comes with certain benefits. It allows you to be flexible with your wealth management in retirement, allowing you to live large one year and live frugally the next to balance it out. This makes things like expensive trips and unexpected healthcare costs fairly easy to absorb.
Living On Investment Income
Another way to accrue retirement income is through investment dividends. This allows you to keep, and perhaps build on your amassed wealth, allowing you to will that wealth to the next generation. It is also helpful in securing long-term income for those who lack the funds to opt for simple savings withdrawals. Aggressive investments can yield impressive returns of up to 10%; you could secure a $40,000 yearly payout with as little as $400,000 invested.
You should not depend on this, however, for wealth management in retirement; it's not consistent and you may lose money in the process. You should aim for a more secure portfolio to generate income over multiple decades of retirement. You can expect a medium-risk investment to generate a 6-8% yearly return and a low-risk one to generate 4-6%. These are safer bets, but require significantly more capital to reach $40,000 ($500,000-$670,000 and $670,000-$1,000,000, respectively). Keep in mind that the entire amount will be tied up in a non-liquid form, and that withdrawing any money from the principle will cause a permanent fall in your income unless you are able to replace the funds; so, consider keeping some extra liquid savings on the side for emergencies.
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