Use all of the available retirement savings tools and accounts.
You would certainly like to have plenty of money saved up when you reach retirement age, so you can enjoy those golden years after a lifetime of work. You can calculate or project how much money you will need to retire in several ways. Although your calculations may present you with a daunting goal, taking a series of smaller steps can get you there.
Project Needed Income
Your retirement savings will provide the income to replace the wages you now earn by working. Use an inflation-based or compound-rate calculator to estimate your income just before retirement based on your current earnings. For example, if you currently earn $50,000 per year, in 20 years your income will be $90,000 if it grows at 2 percent per year. The rule of thumb is that you will need 70 to 80 percent of your pre-retirement income in retirement to maintain the same standard of living. In the example, the midpoint would be a retirement income goal of $67,500 per year.
Other Income Sources
Not all of your retirement income will come from your savings. You may receive a pension from your employer and you will definitely receive something from Social Security. Estimate your other income sources and subtract the amount from your calculated retirement income needs. The Social Security Administration -- SSA -- website has a benefit estimator that allows you to generate an estimate of your Social Security retirement benefit. Subtract the result from your projected retirement income goal. For example, following the example above, if the SSA estimator shows you will receive $20,000 per year, subtract that amount from the $67,500 you calculated you will need and your savings must provide $47,500 per year of income.
Apply Some Rules of Thumb
A couple of rules-of-thumb allow a quick estimate of the amount of money you need to retire. Financial planners recommend that you withdraw no more than 4 percent of your retirement money each year to make sure the money lasts as long as you do. Divide the calculated retirement income from investments by 4 percent (0.04) to get a nest egg goal. For example, to get an income of $47,500 per year, you would need to have approximately $1.2 million. Benefits consultant Aon Hewitt, as reported in "The New York Times," says workers should have put away 11 times their final salary if they plan to retire at age 65; 9.4 times if they delay retirement until 67. Using the $90,000 final pay rate, the savings range would be $850,000 to $1 million.
Set Intermediate Goals and Adjust
The thought of saving a million dollars or more to retire may seem daunting. However, a plan of steady savings into your retirement accounts combined with the power of compound growth make the goal very attainable. Fidelity Investments' retirement savings goals suggest that at age 35, you should have saved one times your income, adding another year's income to savings every 5 years after. So, by age 40, you should have saved two times your income, three times by age 45, until you have eight times your income by age 65.
