What is the right amount to save when aiming for a certain retirement goal?
I am 58 years old earning $100,000 per year and have investments in multiple retirement accounts totaling $686,250. I'm retiring at the age of 65. I am currently investing $16,000 per year in my accounts. I project to have $848,819 in my retirement accounts at the age of 65. I will be collecting $2,200 in Social Security when I retire. I also do not own my home due to my divorce. How much money will I need to hit my projection? Should I be saving more?
If you are starting out with $686,250 and adding $16,000 per year, you should easily have $848,819 in 7 years. In fact, you will probably have more than that based on historical returns of a diversified portfolio.
But I'm not sure that's the question you are asking.
You may be asking if $848,819 is enough money for you. The first step is finding out how much money you think you will need to live on per year. Then deduct your sources of income like social security and any pensions or annuities you may have. What is left is the gap you will need to fund.
Many financial planners have historically advocated a withdrawal rate of 4% from retirement accounts as a safe amount to pull out. I think that is a little high as 3% is a more conservative amount people should consider for their individual situation. 3% of $848,819 would yield $25,465. Combining this with your social security benefit would give you about $50,000 per year.
Your income requirements minus the $50,000 is what you will need to make up either through additional savings before you retire, a part time job in retirement or a drifferent investment approach to yield higher savings.
The first question would be how much you will need to live on during retirement? This amount, minus what you will receive in Social Security is the amount your retirement accounts would need to provide in ongoing retirement income. Assuming you want to generate an after-tax income similar to what you are earning now, you will need to save more. A fairly simple financial plan could help you answer this question, but there are several important variables (tax rates, investment risk, types of accounts, etc.) missing from your scenario needed to give you a confident answer.
So, it looks like you have done a good job saving thus far, but there are still too many unanswered questions as many have hit on cash burn in retirement is key but what will have a bigger drag on your retirement will be healthcare, what types of insurance do you have.
It is estimated that an average, healthy 65-year-old couple will need $245,000 to pay for medical expenses for the remainder of their lives. This does not include long-term care costs*
Healthcare cost will be the 2nd largest expense in retirement**
Medicare only covers about half of healthcare costs in retirement***
*Fidelity Investments retiree health costs estimate, 2015. Healthcare and nursing home costs may vary by state.
** Take Control of Your 6 Biggest Retirement Expenses,” U.S. News & World Report, August 2015
*** U.S. News & World Report, Take control of your 6 biggest retirement expenses, August 2016
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Save as much as you can while still living comfortably. If you max out your retirement plan contribution limits, you can save in individual accounts. Your date to collect full social security is age 67. I suggest you at least wait until full social security retirement age while continuing to save. In the meantime, develop a list of projected wants and needs; detailed budget of your desired lifestyle upon retirement. If you want to buy a home or move to a new area, take the time to shop around. Consult a good planner.
You should be saving the maximum and live beneath your means. If you are single then you can put 6500 per year into a Roth IRA and a significant amount into your 401(k) plan. You can also put the maximum 4400 into an HSA as long as your health insurance is HSA-compatible. You can keep contributing to your Roth and 401(k) as long as you are working, and you can keep putting money into your HSA until you start with Medicare at age 65 (assuming you do so, otherwise you can keep contributing to your HSA after 65).
If you do all of these things then it won't matter what your target or goals are. You will achieve and surpass them.
If you think you will live to be at least 80 years old then you should delay your Social Security until you reach your 70th birthday. That will give you the highest total lifetime payout especially if you live a long life.