One of the questions that gets asked quite a bit, especially as thoughts turn toward the future, is this: “Will I have enough to retire?”
Deciding how much you need for a comfortable retirement is a personal decision. Here’s how you can check to see if you are on track for retirement:
Retirement Needs in Terms of Monthly Expenses
If you want to make things a little easier on yourself, break your retirement needs down by monthly requirements. Look at your present monthly expenses, and consider what might be different in retirement. I tend to think that my monthly expenses will largely be the same. Right now, I have a mortgage and two car payments, as well as student loan payments.
In retirement, I will have those loans paid off, but my health care expenses will probably be higher, and I will probably want to travel a little more than I do right now. There are rules of thumb that indicate that you will probably only need between 75% and 85% of your current income during retirement, but I prefer to err on the side of caution.
Once you have estimated your likely monthly needs during retirement, it’s time to add up what you think you will have in terms of income. This is where it gets a little bit tricky. Should you include Social Security benefits in the equation? Depends. I’m not as sanguine about Social Security, since I am still in my early 30s. But someone closer to retirement right now might feel comfortable relying on monthly Social Security benefits.
Next, turn to your retirement nest egg. How much will it provide you with on a monthly basis? If you assume a safe withdrawal rate of 4% annually, you can figure out how much you will need by multiplying your expected total nest egg by 0.04. So, if you have $1 million in your retirement portfolio, that amounts to $40,000 a year, or $3,333.33 per month. How does that stack up to what you will need in retirement? Could you live on that now?
If you want to see how much of a nest egg you need to hit monthly income goals, you can reverse the calculation. If you think you need $4,500 a month, that’s $54,000 a year. Divide that number by 0.04, and the nest egg you will need $1.35 million.
Looking for Other Income Sources
If you feel daunted by the idea of trying to amass such a massive nest egg, you can work on developing other income sources for use in retirement. While you should try to make a point of using tax-advantaged retirement accounts, you should also consider other ways to find the income you require in retirement.
You can consider adding income investments (dividend stocks, bonds, etc.) with the help of taxable accounts. It’s also possible to start a business, using what you know, to create a stream of income that you can carry over into retirement. From rental properties to royalties from creative endeavors, there are a number of ways to build passive income to help you meet your retirement goals.
Take steps now to determine what you need in retirement. While you don’t want to rely too heavily on rules of thumb (like the 4% rule), they can give you a general idea of what you face, and give you solid direction.