Want to make a quickie calculation about how much money you’ll need for retirement?
I’ve talked before how, for most people, knowing “your number,” or whatever you want to call it isn’t really all that helpful. The simple reason is that most people cannot save as much for retirement as they should be, so they should just be saving as much as they can. Simple.
But, what if you are getting ready to retire, or if you just want to know how much retirement income you have stored away?
Quick Retirement Income Calculation
The quickest way to calculate your current retirement income is to take the amount of money you have saved, and multiply it by 4%. That’s your current “safe” annual income in retirement.
As in, if you have $1 million stashed away in your 401k plan, you can count on $40,000 per year in income.
Sucks, doesn’t it?
Before we get to some info that might help you feel better, let’s take a look at where the 4% comes from.
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A chimp with a hammer can get you 4% income without ever running you out of principal. In fact, at 4 percent, there is a pretty good chance you’ll die with most of your starting principal intact. The reality is, that in all but the worst circumstances, you are probably good with a 5% withdrawal rate as well. You might eat some principal, but not enough to run out of money in your retirement.
After that, you start using your principal, and taking some chances.
Obviously, taking 6% uses your principal slower than taking 8%, and so on.
How To Get More For Money in Retirement
The 4 percent income number is useful mostly for pointing out that the “big” retirement nest egg you have isn’t really that big at all. After all, if you’ve managed to save $1 million, chances are good that your current income is north of $40,000 per year. And, for those of you sitting on a $300,000 nest egg, it might be a pretty big shock.
So, how do financial planners actually make retirement work for their clients?
Well, most people end up getting some money from Social Security. Currently, the “full” payment is for people retiring at 66, and it is $2,639 per month, or just over $30,000 per year. Add that to your $40,000 from your million dollar retirement account, and you’re looking at a solid retirement.
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But, what about for people with those smaller 401k, and IRA accounts?
The reality is that most people work longer than they think they will. This is helpful part #2.
(The sad Part #3 is that most people who don’t work longer are forced out by failing health. That makes your nest egg what you spend on co-pays, and things to make your house comfy, which is cheaper than living it up in retirement.)
In other words, most people these days work until their late 60s, and a lot into their early 70s. Working until later, increases your Social Security income. The current maximum Social Security benefit for people who retire at 70 is $3,576 per month, or just over $40,000 per year.
These two factors make using your principal easier. If you retire at 72, and you have a $300,000 retirement account, and you use it at a rate of $30,000 per year (10%), you’ll run out of money in the account when you turn 82. On the one hand, that’s a big bummer. On the other hand, how many hiking trips in the Alps do you think you’ll be taking when you’re 83? You still get the Social Security income, so this math actually works out for most middle class Americans, especially if you pay off your house, or go for a reverse mortgage somewhere in there.
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While things will probably work out good enough if you have just a $300,000 nest egg when you retire, that certainly isn’t easy street. It isn’t traveling around the country. It isn’t flying the grandkids home for holidays, and it isn’t golfing, fishing, and whatever else every day either. In other words, you want more money to take your 4% (or more) out of.
How do you get more retirement money? By saving more money. Sure, compound interest works eventually, but nothing you do will give you more retirement income than saving more money will. Jack up your 401k contributions by 1%. It may surprise you how easily you adjust to the higher amount.
If you have a side business (lots of folks do these days), make yourself a deal and put 10% into your Roth IRA, or traditional IRA. Over time, those extra contributions are what will make the difference between retiring young and healthy, or sweating out making it into your 70s.