Many people worry about having enough income in retirement. And it’s hard to get a handle on how much money you’ll need if that milestone is pretty far away.
However, it may help you to know that according to recent Motley Fool research, the average American aged 65 and over spends $48,872 a year. As such, if you have access to a $50,000 annual income in retirement, it may be enough to cover your expenses.
Now the one caveat is that over time, inflation might make it so a $50,000 income no longer suffices. But for now, we’ll go with that number since it’s reflective of what older Americans are spending today.
You may be wondering how much retirement savings you’ll need to come up with $50,000 a year. And the answer is, it depends on different factors.
The Social Security wild card
The average monthly Social Security benefit this year is $1,907, which amounts to about $23,000 a year. However, the rumors you may be hearing about Social Security cuts are true.
This isn’t to say that benefit cuts are set in stone, but they’re a possibility. So while the typical retiree today can perhaps expect about $23,000 a year from Social Security, that may not be the case in the future.
However, if benefit cuts don’t happen, your monthly Social Security checks may be a lot higher than $1,907. That’s because benefits are eligible for an annual cost-of-living adjustment. However, for simplicity purposes, let’s assume that you’ll get a yearly income of $23,000 from Social Security, which means that if you want a retirement income of $50,000 a year, $27,000 of that will have to come from savings.
What withdrawal rate will you use?
Financial experts have long advised withdrawing from retirement savings at a rate of 4% per year. As such, if you’re looking to get $27,000 a year out of your IRA or 401(k) plan, then you’ll need to go into retirement with a balance of $675,000.
Now that may seem like a daunting number. But one thing to remember is that the money in your IRA or 401(k) shouldn’t just sit in cash. Rather, you should be investing that money so it grows over time.
To put it another way, to end up with a $675,000 nest egg, you don’t necessarily have to contribute $675,000 to a brokerage account. You can contribute a lot less if your money grows nicely.
Over the past 50 years, the stock market has averaged a yearly 10% return. But let’s be conservative and say your portfolio doesn’t do as well.
Even if you only end up with a 7% yearly return on your investments, if you were to save $300 a month in a retirement fund account over 40 years, you’d end up with about $719,000, which gives you some leftover money to take some nice vacations during retirement.
Of course, if you think you’ll stick to a more conservative withdrawal rate than 4%, it changes your savings target. If you only plan to hit up your savings to the tune of 3% per year, then to get $27,000 in annual income, you’ll need a balance of $900,000.
The bottom line
The point, either way, is that a $50,000 retirement income is attainable if you start saving early in your career and you invest your money to capitalize on compound growth. In fact, a $100,000 retirement income may be just as doable if you commit to the cause from a young age and prioritize your long-term savings. So don’t be afraid to set lofty goals, especially since many years from now, a $100,000 retirement income may be the equivalent of $50,000, depending on how inflation goes.
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