Retirement calculators assume you can live off of 70 to 80 percent of your most recent salary during retirement, according to nolo.com. Your situation may be different. If you pay off your mortgage before retirement or relocate, you may need less money. NOLO claims most retirees live comfortably off of 40 to 60 percent of what they made in their working years.
Your Actual Retirement Expenses
To figure out how much retirement income you really need, make a list of all of your current expenses. Include not only essentials like food and shelter, but also entertainment and travel, then subtract expenses you're not expecting to have when you retire. This may include mortgage payments if you plan to sell off your house, and commuting expenses you won't have, since you won't be working. Include savings on insurance premiums if you plan to use Medicare. Add in any extra expenses you anticipate, such as extensive travel and long-term care costs. The result of all of these calculations is the amount of money you need to live on each year during retirement.
Savings vs. Income
Once you know how much you need to live on each year, you can figure how much savings you'll have to have. According to U.S. News and World Report Money, you can safely take out four percent of your savings each year during retirement. This allows your portfolio to replenish itself through dividends and interest. You can figure how much savings you need by starting with how much retirement income you need. For example, to generate $50,000 a year, divide that figure by 4 percent and you need $1,250,000 in savings.
Reaching Your Savings Goal
When you know how much savings you need, you can figure how to get from where you are to where you want to be. Use a free online retirement calculator, such as the one at CNN Money. These calculators allow you to enter your current age, current savings, and the total amount you need at retirement. When you press "calculate," it gives you a figure for how much you need to set aside each month to reach your goal. This figure tells you if your current savings rate is on track to reach your retirement goal.
Some Basic Rules
For a quick estimate without all the calculations, follow some rules set out by the "New York Times." By the time you reach age 40, you should have twice your annual salary saved for retirement. When you hit age 45, you should have three times your salary. At age 50, your goal is to have four times your salary. You need five times your salary at age 55. When you turn 60, you need six times your salary set aside. When you reach age 67, your savings should be eight times your most recent salary. Following these guidelines provide you with 85 percent of your last working salary, assuming you withdraw four percent per year.
- Time Magazine Business and Money: What You Should Save By 35, 45, and 55 To Be On Target
- New York Times: Suggested Retirement Savings Goals, by Age
- Bankrate.com: Savings Rates for a Secure Retirement
- Seeking Alpha: A New Take On The 4% Rule
- NOLO: How Much Money Will You Need When You Retire?
- AXA Equitable: What are Catch Up Contributions?
- CNNMoney: Retirement Planner
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.