October 07, 2021
Figuring out how much money you need to retire can seem like a daunting task, especially when it seems like a lifetime away for some of us. There are loads of factors to consider , and an endless list of unknown variables that could crop upon us at any given time.
All that in mind, how the heck should you go about calculating how much you’ll need? There’re many different proposed “rules of thumb” to help guide you along the way, but the reality is that there is no set in stone answer. Retirement needs are very situational and unique and arguably, something only you can properly account for.
Figuring out approximately how much you need to retire
Following an already accepted practice as your retirement plan is great, and it’s a totally valid way to get on the right track. Whether it be saving 15% of your income, maxing out your Roth IRA contributions, or following the 70% rule, these are all good ways to get started. What they don’t do, though, is tell you exactly what you should expect to need.
To truly get an actual, tangible number in your hands, you’ll need to survey your financial situation and your plans for retirement. We need to get specific. Start by asking yourself a few questions. Okay, more than a few, but each of these needs to be answered.
- Will I have an income in retirement?
- Do I plan to have a mortgage/rent by the time I retire?
- What will my monthly expenses, aside from housing, total up to?
- What’s my health insurance situation, and what does it cost me monthly?
- What kind of lifestyle do I want to live? How much extra spending money will I need?
- How much excess savings do I need to feel comfortable and secure?
The answers to these questions will shape your retirement budget. You can use your answers to these to arrive at an approximate total for monthly expenses, housing costs, and how big of an emergency fund you want in addition to your retirement. You’ll take this number and multiply by however many years you plan to be in retirement (usually 30) and develop your plan from that number.
The problem is that, although this is an important step in the process of figuring out how much you’ll need for retirement, it can end up being nothing more than an approximation for those of us with unknowns in our life. The younger you are, the harder it may be to answer some of these things, and thankfully that’s where investing comes in.
Saving Vs Investing For Retirement
Savings are for preservation; investments are for wealth-building. Clearly, It’s much simpler to save for retirement if you know exactly what you need, but when that number is rather vague, the better option might be to just invest and try to accrue as much as we can.
Investing for retirement is important for everyone though. Even if you know your exact dollar amount, it would be unwise not to take advantage of the growth opportunity that investments present, which is something saving lacks.
It’s a balancing act
Saving is key, and should always be priority number one before you start investing for retirement. However, as is with anything, it’s a balancing act. Too much saving can lead to lots of missed opportunities in the market, and too much investing will inevitably increase your risk.
Luckily, there’s plenty of investment vehicles suited just for aspiring retirees, whether you’re barely 18 and in college or 60 and looking to retire soon.
Some ideas to go
There’re many ways to invest for retirement, with perhaps the most straightforward representation of strategies just being a sliding scale of risk. The fact of the matter is that there isn’t one right way to do it, and it depends heavily on your situation. That being said, here are a few reliable strategies.
- Target-date retirement funds: These funds are as simple as they sound. You choose a year you’d like to retire, and the fund automatically adjusts itself as time goes on, moving more conservative as you get closer to the target date, in most cases. These are often just “funds of funds” where an institution creates a basket of ETFs suited for the target date, and adjusts accordingly. This is an option if you want a simple, boring portfolio that you can just add cash to over time..
- Roth IRAs: A Roth IRA is essentially a brokerage account that allows post-tax contributions of up to $6,000 a year of earned income. Meaning, you can’t deduct the contributions from your income like with a typical IRA, but you’ll owe no taxes on earnings withdrawals after 59, and none on contributions at any time. This is a great plan if you want to self-direct your investing and customize what assets your retirement fund holds.
- 401Ks: These aren’t just for people who work for companies with great benefits; self-employed business owners can get in on it too. Traditional 401ks have a higher contribution limit than either of the IRAs at $13,500, and solo 401ks at $19,500. Oh, and there’s also a Roth option on these too.
This is all easier said than done. Yet, the road to wealth-building should be built on a strong foundation of smart investing tactics from trusted sources. With Front, you can actually learn to invest more strategically, with data-driven decisions made simple via its innovative Front Score. Front is the ultimate companion app to Robinhood, Stash, Coinbase, and other brokers that guides new investors with better investing insights.