Study after study indicates that many Americans aren’t ready for retirement. Many Americans wonder if they will be able to retire comfortably, and they aren’t sure where to start when it comes to saving what they need.
You don’t have to be one of those without a clue. You can figure out how much you need to retire on your own, depending on your current situation, and what you hope to accomplish during retirement.
What Do You Want To Do?
The first step is to figure out what you want to do during retirement. Someone who wants to spend most of their time at home has different needs than someone who plans to travel. Your hobbies, style of living, health care needs, and other factors all contribute to the amount of money you will need for retirement.
Take the time to realistically consider what you hope to accomplish during retirement. A good starting point is what you spend on your living right now. Chances are that you will spend less in some areas and more in others once you get to retirement.
If you have debt obligations, such as a mortgage payment or car payment, hopefully you’ll be done making those payments when you are ready to retire. Then, instead of making a monthly mortgage payment, you can put the money toward your retirement lifestyle.
Downsizing can be another way to clear up your finances so that you have more room for retirement living. Consider the possibility of selling your house and moving into something smaller – that you won’t have to make payments on. Getting rid of your stuff can also help.
Another possibility is to consider whether or not you want to work a little bit during retirement. Do you want a part-time job to keep your mind and hands busy? Perhaps you want to work on your own business, or do a little freelancing or consulting. If you plan to work in some capacity during retirement, it can help you reduce the amount you have to set aside right now.
Estimating How Much to Set Aside
Don’t forget to estimate how much you need to set aside for retirement right now. First, you need to figure out what you will need for a successful retirement. For example, if you figure you will need $4,500 a month to live on during retirement in order to be comfortable and do the things you want to do, that amounts to $54,000 per year. If you want to save up enough to live on for 30 years during retirement, you will need $1.62 million.
Of course, that is just how much you need if you don’t have investments that continue to earn interest. This example applies if you save up the money and then spend all your capital. Things are different if you follow the four percent rule, and you only withdraw interest. In this case, you would only need $1.35 million in order to generate the interest needed for $54,000 a year.
If you plan to retire 30 years from now, and you earn seven percent annually, you need to set aside $1,500 each month in order to end up with about $1.8 million. You are better off if you can start earlier, since the longer you save, the more time compound interest has to work on your behalf. You can end up with close to that amount by setting aside $700 a month for 40 years. The cash flow is easier to manage the earlier you start.
Do yourself a favor and run the calculations now. The earlier you start saving for retirement, the better off you’ll be.