4. Follow the rules of thumb.
While every client's situation is different, here are a few basic guidelines to consider.
A. Consider retirement income as a proportion of pre-retirement earnings. Many financial experts suggest that you may spend 70% to 80% of pre-retirement income annually in retirement. This means that if you earn $60,000 per year now, you should budget between $42,000 and $48,000 each year when you retire.
This isn't a hard-and-fast rule, and you might need to set aside considerably more money. Many people require income sources (or savings and investments) that cover 80%, 90% or even 100% of their pre-retirement budget. Everything is dependent on your current and future spending.
B. Set aside 15% of your earnings every year. If you initiate retirement savings soon enough, a 15% annual contribution rate may be adequate to accomplish your objectives. If you're behind schedule, you'll likely need to save a lot more money every year to catch up.
Tolen Teigen, chief investment officer of FinDec, a financial planning firm, argues that as people get older, the amount they require to save for achieving the same end objective roughly doubles every 10 years.
C. When you reach retirement age, you should have saved 10 times your current annual income. As previously stated, many financial consultants and firms such as Fidelity recommend that you have saved around 10 times your yearly wages by the time you reach retirement age. While this may not be exactly what you're looking for, it's an excellent goal to keep in mind. You can always change it based on your predicted retirement needs.
D. Follow the 4% rule. You can also apply the 4% rule, which states that you can withdraw about 4% of your retirement savings in the first year of retirement.
So, if you have $1 million in savings, you would withdraw $40,000 in your first year of retirement, either in one lump sum or over time. You could modify this amount higher in succeeding years of retirement to maintain pace with cost-of-living raises.
The notion is that if you stick to this rule, you won't run out of money in retirement. The 4% guideline is designed to ensure that your funds are likely to last for at least 30 years.
The following formula is used to generate retirement savings based on the 4% rule:
Retirement savings target = annual income required times 25.
It's worth noting that there has never been agreement on a generally applicable 4% withdrawal rate. Bill Bengen, who conducted the research on which the rule is based, suggests a withdrawal rate of 4.4% to 4.5% could be prudent, while Morningstar recommends a 3.3% withdrawal rate as a rule of thumb.
The rule is based on the assumption that you'll take out the same amount of money every year in retirement, adjusted for inflation. It also assumes that your portfolio will be evenly between stocks and bond.