Hi! I'm Kirsten from The Motley Fool.
In this FAQ, we're going to answer a question everyone wants to know -- how much money do
I need to retire? First of all, it's great that you're asking yourself this question.
Having enough for retirement doesn't just happen. It's a coordinated effort.
That effort is easier if you have a goal in mind. So, how much money do you need to retire?
The real answer is that it's different for everyone, but let's start with the general
rule and break down how that can vary.
Most studies agree that in order to retire, you will need about 12X your annual salary
at retirement age. If that sounds like a lot, that's because it is.
That's why it's so important to save -- or, as I like to think of it, paying your future self.
If that number sounds intimidating, let's look at all the ways you can build up to that.
First of all, that total amount you need for retirement does include Social Security.
Most people have been paying into Social Security a little bit with each paycheck every year that they work.
If that's you, you can expect to receive a monthly benefit check in retirement.
To maximize your monthly check, there's a couple of things you can do.
One, make as high a salary as you possibly can. You were probably already doing that one.
Two, work a full 35 years, because that's how many years the Social Security Administration
is basing your benefits on.
And, as a bonus, if you're making a higher salary toward the end of your career, which
is quite common, you can work more than 35 years to increase your monthly Social Security benefit check.
Three, delay retirement.
We here at The Motley Fool like to say that 70 is the new 65 when it comes to retirement age.
For more details on calculating your expected monthly Social Security benefits and how to
optimize that check, check out the link in the description below.
But even then, Social Security will not cover all that you need in retirement.
In its benefit overview document, the Social Security Administration makes it clear --
Social Security was never meant to be the only source of income for people when they retire.
It is designed to replace a percentage of your income, depending on how much you earn.
For very low earners, Social Security can provide up to 75% of your retirement needs.
For medium earners, about 40%. For high earners, about 27%.
The rest of your retirement funds will come from whatever you have saved, so it's important
to make sure you are saving.
The best place to start, if it's available to you, is an employee savings plan.
Most commonly, this is a 401(k). If your employer offers one, make sure you're using it.
This is a tax-advantaged account for saving, meaning you don't have to pay any taxes now
on the money you contribute to this account.
Plus, according to the Bureau of Labor Statistics, roughly half of companies offer a 401(k) match,
up to an average of 3%.
That means, as an example, that if you contributed 3% of your paycheck to this account, your
employer will match it with another 3%. That's free money.
Make sure to save at least enough to get the full employer's match.
Ideally, a solid personal savings goal is 15% of your paycheck, including any company match.
If your company will match up to 5%, you should personally sock away 10% of your paycheck
into your workplace retirement account, for a total of 15% saved.
By the way, if you don't have a workplace plan, you can still save in an individual
retirement account, an IRA; or, if you're self-employed, you can use a solo 401(k).
The beauty of all these retirement accounts is that your money grows in two ways.
First, it will grow as you steadily contribute to it each month.
But second, all the money in your account will be invested and will grow all on its
own through the magic of compounding interest.
For a quick example, investing $3,000 per year for 40 years at an annual rate of 8%
yields over $750,000 come retirement time.
That may be enough for people with a relatively low cost of living, but it might not be close
to enough for folks that head into retirement with a lot of expenses.
That's why it's also important to think about the money you have going out when you're making
your retirement plans.
Maybe you had children who had since moved out of your home.
Consider downsizing.
If you live in an expensive area, consider moving somewhere with a lower cost of living.
Maybe even move to a state with no state income tax.
That means fewer taxes on Social Security benefits, 401(k) withdrawals, and other retirement income.
There's a reason Florida is such a popular retirement destination.
There isn't a one-size-fits-all answer to how much money you need to comfortably retire,
but understanding the 12X income rule, realizing that Social Security is just a part of the
retirement picture, and adjusting expenses will put you on the path to finding the right figure for yourself.
Thanks for watching, everyone!
If you have any thoughts on the topic or have any future topics you'd like to request, drop a comment below.
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