How Much Money You Should Live On During Retirement
Confused about how much you should plan to live on during retirement? You're not the only one. Here are 5 things you should know when you're setting your ideal retirement income goals.
The 4 Percent Withdrawal Rule
This rule says you can safely withdraw 4 percent of your retirement portfolio each year without running out of money. For example, if you have $1 million in your retirement portfolio, you can withdraw $40,000 per year. (Lately, some more conservative financial experts have begun pointing people to the 3 Percent Withdrawal Rule, citing a slowing economy as a factor.)
The 85 Percent Rule
Many experts say you need to save enough money so you'll have 85 percent of your pre-retirement income. For example, if you earn $50,000 a year at your day job, you should save enough to create a yearly retirement income of $42,500. (Other financial experts say 75 to 80 percent of your pre-retirement income is enough. They argue people tend to spend less money in their 80s and 90s.)
The Multiply-by-25 Rule
Once you've calculated your ideal retirement income, you need to use this data to figure out the size of your ideal retirement portfolio. It's easy: Just multiply your yearly retirement income goal by 25 to find out how much money you need to meet the 4 percent rule. In this example, $42,500 x 25 = $1.06 million that you'd need to save for retirement. (If you want to base your projections on the safer 3 percent rule, multiply your retirement income goal by 33.)
Disagreement on Rules
Some financial experts say you should obtain your ideal retirement income based on your current expenses, not your current income. If you earn $50,000 per year but only spend $30,000, then run your calculations based on the $30,000 number. (If you're in debt and are earning less than you're spending, get your spending in check first. Then project for retirement based on your actual spending.)
Don't forget, your retirement portfolio is only one leg of a three-legged retirement savings stool. The other two "legs" are pensions and Social Security income. You may or may not receive a pension. Roughly 2/3rds of Americans don't get one. If you're eligible for a pension, its size and terms will depend on your employer. Meanwhile, Social Security income is tough to predict, especially if you're young. That's why -- for the purposes of planning -- we prefer to focus on the piece of the puzzle that you can control.