A majority of people are under the impression that retirement planning is a complicated affair. Thus, they use this excuse to avoid this crucial decision. But retirement planning isn’t as tough as it seems. The first part of retirement saving planning requires asking yourself, “How much do I need to retire?” And the answer varies from person to person. Besides, it also depends on the lifestyle you would want and the income that you generate now.
Let’s talk: Saving vs Investing?
A study revealed that about 64% of people believe themselves to be savers and not investors. Thus, they tend to put all their money into a savings account rather than a brokerage account, IRA, Health Savings Account (HSA). The problem with this strategy is that savings account have quite low returns or nothing at all. Whereas with investments, you can double the same money over some time.
When it comes to investing, you need to pay close attention and actively participate to make your money grow. This works with all types of investment accounts. And to get the maximum benefit from investment plans, it is best to consult professional services. Besides, 95% of the participants of a survey feel somewhat confident to invest when the advice comes from a pro.
How Much Do You Need To Retire?
Experts suggest that your retirement income should be at least 80-85% of the final pre-retirement salary. That means if you happen to make $100,000 annually at retirement, you should make at least $80,000 per year to lead a comfortable lifestyle after retirement. Also, these numbers will vary if you plan to travel extensively after your retirement. Besides, the amount can be adjusted depending on other income sources like pensions, social security, part-time employment and more.
The 4% Rule
Different people use various techniques to calculate how much money they need to retirement saving income they want. One formula that you can try is to divide your desired annual income by 4%. This is known as the 4% rule.
For example, to generate the $80,000 mentioned above, you need a nest egg at the retirement of $2 million which is (80,000 ÷ 0.04). This method assumes a 5% return on investment. However, make sure that you stick to this rule throughout the year. Straying during this plan can lead to major consequences.
If you want to try something more aggressive, then you should save 25% of your gross salary every year. For this technique to work, start it during your 20’s. Though the 25% savings may seem tough, have a look at the long term benefits. By the age of 30, you should be able to accumulate the full annual salary.
The Bottom Line
Many people hesitate to plan a safe and comfortable retirement journey. However, do know that it’s never too late to start planning retirement saving . No matter what strategy you use, 20x of your annual income or the 4% rule, make sure to stick to it till the very end. Any changes to the plan may lead to irreversible losses.