When it Comes to Retirement Planning, Know the Number You’re Working Toward

“How much money do I need to retire?”

This is a question we often hear from clients, ranging from younger workers just starting out in their 20s to people counting the last few months until they can enter their dream retirement. As with most things, the answer depends on many factors. For example, what do you want to do in retirement? Are you going to travel? Will you upgrade your home? Alternatively, will you downsize to a smaller one?

Everyone’s answers to those questions will be different. There’s no one-size-fits-all retirement, and neither is there a one-size-fits-all answer to the question of how much you’ll need to retire. Instead, it’s important to consider several different factors, such as your current level of income and your expected future sources of income, to help you determine what amount you should be saving.

Replacement Ratio

First, you’ll want to figure out what’s called your “replacement ratio,” which is the percent of your pre-retirement income that you’ll need to live comfortably in retirement. Many wealth advisors recommend starting with a base of 70% to 90% of your pre-retirement income. That means if you have a gross income of $100,000 before you retire, you may need about $70,000 to $90,000 per year in replacement income after you retire.

Of course, your exact replacement ratio will depend on your retirement lifestyle and at what age you choose to retire. By thinking carefully about what your retirement lifestyle will be and how long you expect to be in retirement, you can begin to fine-tune your replacement ratio estimate.

Income Sources

Beyond your replacement ratio, it’s also important to understand the primary sources of your retirement income. This is an evolving answer. Traditionally, Americans have relied heavily on company pension plans and Social Security to fund the majority of their retirement. More recently, however, those traditional sources of income are becoming less prominent as IRAs, 401(k)s and personal savings are becoming a bigger piece of the retirement pie.

When it comes to Social Security, you might assume that since you’ve been paying into the program for as long as you’ve been working, the money will be there for you when you need it. The reality is not quite so simple. Social Security is a “pay-as-you-go” system, which means the money you’ve contributed over the years has gone to pay the benefit for individuals who were in retirement at the time it was deducted from your paycheck.

To add to that, demographics are changing as well. More people are entering retirement, and the number of Social Security recipients has been increasing at a higher rate than the number of workers in the country. This has put a strain on the program, making it essential to have other sources of retirement savings you can count on, including an IRA and/or 401(k).

Know Where You’re Going

No matter where your retirement income will come from, the most important thing is to know what you’re working toward and find a solution that fits you. Everyone’s situation is different, and your number will depend on your specific circumstances. By considering your current level of income and your goals for retirement, you can start to narrow in on how much you may need to retire – and then create a savings plan to get there.

This article was published in the Q3 2024 issue of the Bell Wealth newsletter.