Saving for retirement is the granddaddy of all financial goals--but how much do you really need? Find out where retirement income comes from and easy ways to figure the amount of savings and income you'll need to enjoy a comfortable retirement.
Let’s say you earned more than the annual Social Security threshold for most of your career. If you fully retired this year at age 66, the maximum benefit would be $2,788 per month. But if you took early retirement, you’d only receive $2,158.
To increase your payout, you can delay retirement until age 70. If you took late retirement this year, the maximum benefit would be $3,698. That’s almost 33% more income per month for the rest of your life for waiting a few years to receive it. That’s a simple way to secure a more comfortable retirement.
Again, these monthly benefits reflect the maximum if you were a high earner throughout your entire career. If you’re a middle-class American who fully retired this year, you could expect a benefit in the neighborhood of $1,600 per month.
Once you reach age 25, Social Security statements are mailed out each year, about three months before your birthday. After you’ve worked long enough to qualify, the statement includes an estimate of your future income.
Remember that if you take time off from work, your benefit can go down, or if you get a raise or a second job, it can go up. Also, any earnings that don’t have Social Security taxes withheld won’t show up on your statement and be factored into your future benefits.
If you’re worried that the future of Social Security is in jeopardy, don’t be. It has a reserve fund to pay all benefits through 2031. Beyond that date, small policy changes—such as increasing the payroll and self-employment tax or increasing the annual income threshold—are all we’d need to raise revenue and keep the program healthy.
If you want to learn more about Social Security, go paperless, check your earnings history, and see your estimated future retirement income, create an online account at ssa.gov. Review your reported earnings for any errors because mistakes could keep you from receiving all the benefits you’re entitled to.
Your Personal Retirement Benefits
While having some amount of Social Security to rely on in retirement is great, it’s not going to be enough. The program was designed to be a safety net for unprepared retirees, not a sole source of income.
If you’re one of a declining number of employees who have a workplace pension, consider yourself fortunate. A typical pension pays in the neighborhood of 2% of your income for every year worked. For example, if you stay with your company for 20 years, your future benefit might be 40% of your pre-retirement income.
The majority of workers don’t have a pension, but have a retirement plan, such as a 401k or a 403b, instead. Pensions have fallen from favor because they’re very expensive. Offering a retirement plan costs companies much less because workers bear the burden of funding them, not employers.
If you don’t have a retirement plan at work, or you’re self-employed, there are a variety of options, such as an IRA, SEP-IRA, or solo 401k. Qualified retirement accounts offer tax benefits, which make it easier to save and build your nest egg faster.
How much income you can take from retirement accounts or other personal savings and investments depends on the balances when you retire. How much you’re able to accumulate depends on three main factors:
- How much you contribute
- Your account fees
- Your investment return
The only variable you have total control over is how much you contribute. I recommend saving a minimum of 10% to 15% of your gross income for retirement. Yes, it’s more difficult than parting with 2% or 3%, but making sacrifices to invest more will pay off.
While no one likes the idea of paying fees, they’re unavoidable. Companies that manage investments and administer accounts have lots of expenses to cover. All you can do is choose low-fee investments so they take as little of your earnings as possible.
Your investment return will vary depending on what types of investment you choose. My recommendation is to pick passively managed, low-cost funds, such as stock index funds. These highly diversified investments mirror the general performance of a particular stock market.
The value of index funds will go up and down in the short term; however, over time the market has increased. For example, from 1950 to 2018, the S&P 500 rose an average of 10.5%. You could accumulate a massive retirement account even if you earn less.
Young investors should typically own mostly stock funds because they give higher returns over the long term. There are also bond index funds, which are more conservative with lower returns. As you approach retirement, you’ll want to own less stock and more bonds to protect your account from potential losses.