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Part 1 of 4:
Planning Your Retirement
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Determine your planned retirement age.The age at which you will retire has a large impact on your retirement planning. While it is impossible to know, especially early on, when exactly you will retire, planning for a certain age can help guide your decisions. For Social Security purposes, your retirement age can be either be after or before your “full” retirement age. However, you will not receive any benefits until age 62.
- Retiring past your full retirement age allows you to receive full Social Security benefits. Retiring at any point between 62 and your full retirement age slightly decreases your benefits, depending on how close your age is to 62.
- Your full retirement age depends on the year of your birth. The Social Security Administration (SSA) provides a schedule for determining this age here: https://www.ssa.gov/planners/retire/agereduction.html.
- The reductions in benefits are calculated such that the average beneficiary receives the same amount of total Social Security payments, regardless of when they retire.[1] X Trustworthy Source US Social Security Administration Independent U.S. government agency that administers Social Security and related information Go to source
- If in doubt, just use your full retirement age.
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Estimate your life expectancy. Although it may be unpleasant to think about, calculating your life expectancy is necessary to figure out how many years of retirement you will have to save for. According to the SSA, the average American male can expect to live to around age 84, while women can expect to reach 87. However, one in four (for both genders) will live past 90 and about ten percent will live to 95. Consider your own lifestyle choices and family history to make an assessment of how long you can expect to live.[2] X Trustworthy Source US Social Security Administration Independent U.S. government agency that administers Social Security and related information Go to source
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Consider whether or not you will continue to work after retirement. If you have not yet reached full retirement age and continue working, you may experience a reduction in Social Security benefits until you reach full retirement age. This depends on how much you make each year. However, after you reach full retirement age, there is no limit to how much you can make each year. Considering whether or not you will continue working after retirement can also factor into your deciding how much you need to save.[3] X Trustworthy Source US Social Security Administration Independent U.S. government agency that administers Social Security and related information Go to source
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Estimate your retirement expenses.Start by estimating the length of your retirement. This is just your estimated life expectancy minus your expected retirement age. So, for example, if you are planning to retire at 65 and are a male (life expectancy 85), you should plan for at least 20 years of retirement. From here, the standard rule of thumb is to multiply your annual income from before retirement by 70 percent to get your estimate retirement expenses. So, for example, if you made $60,000 before retirement, you would need $42,000 per year in retirement. So, for an expected 20 year retirement, you would need a total of 20*$42,000, or $840,000.
- The percentage of your pre-retirement income may vary depending on how you plan to live after retirement. For example, 70 percent is satisfactory if you have your home paid for and are in good health. However, if you are unhealthy you may want to save more for medical costs.
- Alternately, you may want to save more if you have more expensive goals for your retirement, like if you want to spend it traveling or build your dream home.[4] X Research source
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Part 2 of 4:
Figuring Out How Much You Need to Save
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Estimate your Social Security benefits.Your actual benefit amounts will not be known until you apply for them. However, you can estimate your benefits if you are close to retirement by visiting the SSA’s website and using their calculation tool. The tool can be found here:https://www.ssa.gov/retire/estimator.html. If you are younger, you can estimate your Social Security benefits using another calculator provided by the Consumer Financial Protection Bureau:http://www.consumerfinance.gov/retirement/before-you-claim/.
- At any point before you retire, Social Security benefits could be reduced, increased, or eliminated. If at all possible, it’s best to plan for retirement until the assumption that you may not receive these benefits.[5] X Trustworthy Source US Social Security Administration Independent U.S. government agency that administers Social Security and related information Go to source
- For example, imagine that you qualify for $2,000 per month in Social Security benefits. This would give you $24,000 per year and $480,000 over your estimated 20-year retirement. This would reduce your total amount needed for retirement from $840,000 to $360,000.
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Figure out your income from pensions and annuities.Depending on your choices before retirement, you may receive income in retirement from company pensions or annuities you have purchased. Calculate how much you will receive from these benefits over the course of your retirement and subtract that amount from the total that you need for retirement.[6] X Research source
- For example, if you expect to receive $6,000 per year from these payments, this would give you a total of 20*$6,000, or $120,000 over the course of your retirement. This would reduce your total required retirement amount to $240,000.
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