What difference would $200,000 make to your retirement nest egg? If you decide you can retire comfortably with $200,000 less in savings, how much earlier could you retire?
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And what’s the first retirement planning step you should take if you want to retire early or save that extra $200,000?
These are real world questions because $200,000 is how much less money – that’s right, less – 401(k) plan workers say Charles Schwab (SCHW) they will need to start their retirement compared to the amount they thought they would need in 2021.
Now 401(k) members say they will only need $1.7 million for retirement. That’s down from the $1.9 million workers said they needed 14 months ago.
This translates to working about two and a half years less if you continue to save at the same pace, in a typical work-and-save scenario.
Retirement: when?
This analysis assumes you start working and saving at age 25. It also assumes that you retire at age 70. Why ? This is when your Social Security benefit will be maximum. Under the current rules, your advantage cannot increase simply by delaying its start beyond 70.
This scenario also assumes that your annual salary is $50,000 at age 25 and increases by 2% per year.
It’s realistic. The average annual salary of U.S. private sector nonfarm workers of all ages was $58,060 in Julyaccording to the Bureau of Labor Statistics.
This scenario also assumes that your retirement savings are invested so that they grow at an average annual rate of 7%.
It’s conservative. On average, the S&P 500 has risen more than 10% per year since 1926, through July 31 of this year. And that includes many steep downturns such as the Great Depression.
How much you need to save for retirement
Additionally, our forecast assumes that you lose 6.87% of your salary. That’s what it will take to reach a balance of $1.9 million at age 70.
This savings rate of 6.87% should be quite doable. This is well below the 10% that financial advisors universally recommend. Hopefully it shouldn’t cost you much.
Joint venture correspondence
And we’re assuming you’re the most common company size: 50% of what you contribute, up to 6% of your annual salary.
So overall, by the time you hit age 70, your nest egg would be around $1.9 million.
At this rate, your retirement savings balance will have reached $1.7 million by the time you are around 67½.
So it takes two and a half years to save the extra $200,000.
Most important question before retirement
But what you really need to determine is how much income your savings will provide in retirement.
Understanding this should be your first step in planning for retirement, says Rob Williams, managing director of financial planning, retirement income and wealth management at Charles Schwab.
Do this before you even choose a target amount for your retirement savings balance.
Why focus on revenue? The best way to determine how much savings you’ll need in retirement is to determine how much income your savings will generate.
Will it be enough based on your lifestyle, health and life expectancy?
Online calculators
To find out how much income your savings generate, use an online retirement income calculator. Calculators usually tell you how they arrive at their conclusions.
If the income projection isn’t high enough, change the numbers to see how much savings you need to generate the amount of income you want. “The modern approach to retirement planning isn’t about interest rates and CD rates or bonds,” Williams said. “This is the amount you can withdraw from a diversified portfolio for the number of years you plan to be in retirement, with a cushion so you can be sure the money will last.”
Second stage of planning
Your second step? Don’t forget that you will have financial assistance. You won’t have to cover all your expenses with your savings. According to Fidelity Investments, a single-income household with $100,000 of pre-retirement income at age 67 can expect Social Security to replace 27% of their pre-retirement income before taxes.
Forty-five percent of their replacement income will typically come from their own savings.
The household compensates for the remaining 28% by reducing its expenses after retirement. The household no longer needs to spend money on things like commuting to work, buying work clothes, paying for lunch at work and contributing income to retirement savings, Fidelity says.
When it comes to nuts and bolts to actually save money, stick to the basics:
- Start early. Start saving for retirement as soon as you start working. “The later you start, the more dollars you’ll have to take out of your salary each month,” Williams said.
- Save enough. Experts invite you to save 10% of your annual salary. Chances are your total savings will be around 15% of your paycheck once you receive correspondence from the company.
- Invest your savings correctly. When you are young, invest for growth. The part of your portfolio that isn’t intended to pay for short-term goals has time to bounce back from any market pullback, like the current one. In your 50s and older, whether you dedicate 100% of your long-term diversified portfolio to equity funds depends on your risk tolerance, goals and timeline. But focus on growth when you’re young. In your 20s, 30s and 40s, invest up to 100% in stocks and equity fundssaid T. Rowe Price.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for advice on retirement planning and actively managing consistently outperforming portfolios.
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