The average baby boomer says the ideal age for retirement is 62, according to a recent Bankrate survey. However, want to retire and retire financially are two completely different things.
The ability to retire comfortably is about earning enough income to cover your living expenses for the rest of your life. So before you can say that you are ready to retire, you need to know how much income you need, where it comes from and how much you should save.
How much retirement income do you need?
How much money do you have to save before you retire? The most common response from Americans is $ 1
Here's the first thing you need to know. Being able to retire comfortably is not just about how much money you've saved. Rather, it's about whether you can generate enough income to cover your expenses during a decades-long retirement.
Think about it. If you need $ 4,000 a month to live a comfortable lifestyle, and you receive $ 1,600 a month from social security and $ 2,400 a month from a pension, then it does not matter how much you have on the bank; Their income is covered independently. On the other hand, if you need $ 4,000 a month, but your only source of steady income is your 1,600 social security benefit, then you need a sizeable nest egg to bridge the gap.
So, how much income do you need to retire? As with most financial issues, there is no universal answer, but there is a good rule of thumb that you can change according to your individual circumstances.
The 80% Rule
This rule of thumb is that you need about 80% of your early retirement income to get the same quality of life after retirement.
You may be wondering why it would not cost 100% of your early retirement income to meet the […] same lifestyle. Well, the 80% rule assumes that while most of your retired living expenses are about the same, two major expenses will disappear if you leave the workforce:
- retirement savings. The 80% rule assumes that workers invest 10% of their income in retirement accounts until they finally stop working.
- Labor-related expenses such as transportation, dry-cleaning, and supplies not provided by your employer] Each person's situation is different, so we can adjust the 80% rule to your individual circumstances. For example, if you currently save 15% of your retirement income, that's an additional 5% of your early retirement income that you do not need.
Similarly, if there are other expenses that you will not have after retirement, these can also be deducted from your retirement income. You may have planned your mortgage to be fully paid on retirement. If that's the case, you do not have to worry about your home payment.
Also note that the 80% rule assumes that you want to maintain the same lifestyle so that any deviation from it is possible. Also change your income. If you plan to lead a frugal life in retirement, you can get by with significantly less money. On the other hand, if you plan to travel the world, indulge your grandchildren, or tackle one or two expensive hobbies, then you should plan this in your income estimates.
I will lead you through an example Later, you should consider how much of your current income you need to replace to retire with the lifestyle you desire.
What can you expect from Social Security?
Virtually every American retiree receives social security benefits, so we'll talk about this source of retirement income first. An important step in deciding whether to retire is to figure out how much income you can expect from social security.
If you are unfamiliar, here is a brief overview of how the social security formula works] First, the income that you earned each year of your life is adjusted for inflation up to the maximum amount that is subject to payroll tax. Then the inflation adjusted income of your 35 highest income years is averaged together and divided by 12 to get your average indexed monthly earnings (AIME). If you have worked less than 35 years, a zero is included in the average every year you are just 35 years old.
Your AIME will then be applied to a formula to determine your initial monthly retirement pension if you are claiming social security at full retirement age. If you were born in 1954 or earlier, your full retirement age is 66 years. If you were born in 1960 or later, your full retirement age is 67 years. If you were born between 1955 and 1959, your full retirement age is somewhere in between.
Regardless of when you begin to receive social security benefits, your full retirement pension or the benefit you are entitled to upon reaching retirement age (also known as primary insurance or PIA) is calculated using the formula was used in the year in which you were first eligible for benefits . In other words, for a perfectly accurate calculation, you should use the social insurance formula from the year you were 62 years old.
You can find historical information about the social security formula on the SSA website. In earlier years, the formula worked the same as it did today, but the two monthly income thresholds in the formula (known as "break points") are different. Here is the formula 2018; To calculate your PIA, you should only exchange the two curved points.
If you elect your 62nd birthday in 2018, your full-annuity initial social security benefit is the sum of:
- 90% of the first $ 885 in AIME
- 32% of the amount greater than $ 885, but less than $ 5,397  15% of the amount greater than $ 5,397  Unless you claim social security at age 62, your PIA will be adjusted upwards for annual adjustments to the cost of living for Social Security, or COLAs, for each year until you become decide to take advantage. In addition, any income after the year in which you are 62 years old may also be included in the AIME calculation and may increase your primary insurance amount even further. The Social Security Agency has a good example, if all this sounds confusing.
If you opt for social insurance before or after your full retirement age, your benefit will be permanently reduced or increased. Specifically, here are the three rules that the SSA uses:
- If you claim Social Security before reaching full retirement age, your benefit will be permanently reduced by 6 and 2/3% for each year you are in 0 , 56% per month), up to 36 months earlier.
- Over 36 months before your full retirement age, your contribution will be reduced by 5% per annum (approximately 0.42% per month) until the age of 62.  If you postpone social security beyond your full retirement age, your benefit will increase at a rate of 8% per annum (0.67% per month) beyond your full retirement beyond the age of 70, if your potential social security benefit is yours Maximum Achieved
The best way to estimate your social security income, especially if you are about to retire, is to sign up for the Social Security Annual Declaration. If you have not already done so, you can create a mySocialSecurity account at www.ssa.gov, where you can easily see your latest statement and find other important information about Social Security and Medicare.
How much income do you have? Do you need your savings?
Once you have a good idea of how much you can expect from social security, as well as other reliable sources of income such as pensions, you can calculate how much income you need from your savings
Take your retirement income, you Earlier and subtract your annual expected income from social security, pensions, annuities, and other reliable sources of income. For example, if you find that you need $ 75,000 in annual retirement income and expect $ 25,000 in social security benefits per annum without pensions or other sources of income, you will need $ 50,000 in savings to reach your goal  How long do you need your savings?
There is no way to know exactly how long you will live, but you want to prepare for longevity. In other words, make sure that you do not survive your money.
To give just a few statistics, keep in mind that American men and women have a life expectancy of 20% and 32%, respectively, to turn 90 years old. For married couples, there is a 72% chance that at least one spouse will turn 85, a 45% chance that at least 90 will live, and an 18% chance that it will become 95, according to the Society of Actuaries ,
So, if you retire at the age of 65 with reasonably good health, it is wise to assume that your money will last at least 30 years. Planning for even longer is better, and if you retire sooner or later than 65, you can adjust your assumptions accordingly.
How much money can you safely withdraw from your nest egg?
A common rule used by financial planners is known as the "4% Retirement Rule". In simple terms, this rule says that you can withdraw 4% of your retirement assets in the first year of your retirement, and adjust that amount up in subsequent years to keep up with inflation. Stick to this plan, and your money has an excellent chance of surviving for a 30-year retirement.
It is important to mention that the 4% rule makes certain assumptions. Specifically, it starts from a 30-year retirement period. So, if you retire early, you may need to make sure your money stays longer. It also assumes that at least 50% of your portfolio is allocated to equities, the remainder to fixed income investments such as bonds. In other words, if you decide to put your entire Nestei in a savings account, the 4% rule is probably inadequate.
While there are some mistakes with the 4% rule, it is still a good starting point for determining How much money can you safely deduct from your savings every year? If you want to be a little more conservative in your assumptions, you can start with a payout of 3.5% or even 3%.
Do not Forget Inflation
Finally another often overlooked step of retirement planning is inflation. In other words, a dollar today will not have the same value in the future, and this must be taken into account.
While there is no way to accurately predict future inflation rates, inflation averaged about 3% per annum. It is extremely important to take inflation into account when you intend to retire in many years. For the purposes of this discussion, I will talk about people who are retiring or about to reach retirement age, so I will ignore inflation in my examples. But if you're 40 years old, inflation will have a big impact on how much money you need to retire.
That's why that's important. Suppose you plan to retire in 20 years, and you expect to need $ 1 million in savings based on the methods described in this article. Remember, that's a million dollars in today's dollars. Assuming that the inflation rate averages 3% over the next 20 years, you will actually need $ 1.8 million if you want to reach the equivalent of $ 1 million today.
How much do you save?
Let's take a step-by-step profitability analysis for a hypothetical couple. Here is the case.
Let's say Teri and Jerry are both 64 years old and earn a salary of $ 100,000 a year. Teri expects a social security income of $ 1,800 per month, and Jerry expects $ 1,500 per month at his full retirement age (66). In addition, Teri expects a monthly pension of $ 700 from a previous employer. Between both spouses they have 800,000 US dollars in retirement assets.
Teri and Jerry both expect fairly typical pension expenditures, so the 80% rule states that they should expect an annual income requirement of $ 80,000. They are considering retiring this year, but they are not sure if they are ready.
First, when Teri and Jerry retire at the age of 64, their benefits are reduced to $ 1,560 and $ 1,300, respectively. Combined with Teri's expected retirement income, the annual income is $ 42,270. Taking that away from their estimated income needs, we're told they have to deduct $ 37,280 a year from retirement savings.  However, the 4% rule states that Teri and Jerry can only deduct $ 32,000 per year from their $ 800,000 nest egg on inflation after the first year of retirement). In that case, it may be wise for them to postpone their retirement for a year or two. Their social security income will be higher, they will have extra time to top up their retirement savings, and hopefully their investment will grow a bit more.
Retired early? Here's another thing to keep in mind
If you plan to retire before the age of 65, there is another important factor to consider: healthcare. Many people, especially those who retire from the civil service, are allowed to keep their retirement benefits for retired workers. Others, on the other hand, are not so lucky.
While it is possible to claim social security benefits at the age of 62, this can not be said about Medicare. You must wait until you reach the age of 65 to receive Medicare benefits, regardless of when you actually retire.
So, if you retire before the age of 65 and are not covered by an employer's health plan, you must do so budget for the cost of purchasing your own health insurance in addition to the other income requirements discussed here.
And these costs can be significant. The average 60-year-old can expect to pay around $ 8,000 annually for a "silver" plan, which is bought at the health authorities, while a more comprehensive "gold" plan can be estimated closer to 9,500 – per person ,
To be clear, I'm not saying that the cost of health insurance should absolutely prevent you from retiring early if you can afford it. However, this is a significant additional expense that needs to be considered.
What if you are not ready to retire?
The obvious answer is that if you're not ready to retire, or if you rate your retirement readiness as "borderline," then it's probably a good idea to wait. One or two additional years of pension account contributions and compound interest can make a bigger difference than you might think.
In addition, delaying your retirement can have a double advantage when it comes to social security and you will be retiring credits and possibly also boosting your AIME.
It is also important to mention that if you want to retire as soon as possible, you will have the option of receiving contributions to your retirement accounts after the age of 50 can reach up to $ 6,500 an IRA a year Contribute up to $ 24,500 of your compensation to a qualifying plan such as a 401 (k).
The bottom line is that, even if you are not completely ready when you retire, the methods described here can give you a good idea of where you stand, and help you figure out how far you are from it are to retire.