How much income do you need each year to retire comfortably?
We’ve looked at different ways of figuring out your retirement nest egg size, like the 4% Rule. But even that assumption is predicated on another assumption, that you know how much you need each year. Do you know the answer to that question for you?
How much income do you need each year to retire?
Estimating how much you will need each year is hard. The amount of money each person needs will relate directly to their unique situation, further complicated by their own list of goals and aspirations. Will you own or rent your living arrangements? Do you have dependents to support? Are family members helping support you? What about your lifestyle, what do you want to do? Do you want to travel? Where do you want to travel to? These are but a few questions that each person needs to answer for themselves, as the answers will greatly impact your financial plans in the future.
Another issue with retirement planning is the time the question becomes important. Deciding and planning for your eventual retirement should start in your early 20’s, when you first start earning money for yourself. At this stage, it is easy to look at your current lifestyle and think, “I can live off KD and ramen noodles. After-all, I’ve been doing it all through college and I turned out fine.”
Unfortunately, that is certainly not the case when you are older. As you grow and develop throughout your career, your lifestyle creeps upwards too. Suddenly ramen noodles and beer aren’t the only things in your diet. And you certainly wouldn’t want to go back to living like you did in your college days, cheap food and cheap student housing included.
If your current living arrangements aren’t how you will live when you retire, and you aren’t sure where life will take you as the decades roll by, what can you do now to prepare as best you can?
Career Planning: Income for Retirement
While we may not have answers to the difficult questions posed earlier, many of us can look ahead in our careers. We are able to see where our careers are taking us, and plan for the roles that make up the general direction we’re facing. Whether that is a paralegal with visions of becoming a partner, or an apprentice electrician looking to become a grand master in her craft. These future roles we are aiming at, and may one-day hold ourselves have an abundance of information about them. This information includes the expected average annual salary. For bench-marking how much you will need in retirement, financial planners will often estimate 80% of your income at your highest earning level.
Planning for income during retirement at 80% of your peak earning potential will allow for lifestyle creep as you become more successful. If you plan on making $ 80,000 / year at your career peak, you should expect to need 80,000 * 80% = $ 64,000 each year during retirement.
This 80% of peak earning potential estimate will help you set a target for your retirement nest-egg to work towards. As with all things of importance, your odds of success greatly increase if you have a clear target and a plan to get there. Think about your career, where you’ll be, and how much that means you should plan for in your retirement. With the right plan, financial freedom is available to everyone.