Even a few years back, the total amount of income that you make during retirement was figured as a three-legged stool, where one leg constituted the employer pensions, another was the Social Security benefits and the other retirement savings. Since then, a lot has changed. There are many amongst us who don’t have employer pensions and hence this makes the whole thing a 2-legged stool. Moreover, due to the rising life expectancies, these two legs might have to often support us for a longer time period – sometimes, probably 2-3 decades.
One thing that hasn’t changed is that there is still not a one-size-fits-all answer to the question, ‘how much retirement income is enough?’ This depends on several factors like the retirement expenses that you can predict in your case. Read on to know more on how you’ll plan your retirement income.
How much you should spend during retirement – Going by your predictions
There are several formulas using which you can get an estimate of how much you can spend during your retirement. There’s a thumb rule that you’ll require around 80% of the amount that you used to spend before retirement. This percentage is clearly based on the fact that there will be few big expenses which will vanish post retirement. On the other hand, few other expenses may go up.
Retirees often complain that during their initial years of retirement, their expenses often surpass what they used to spend before retirement. Most of this is usually unpredictable but as you move closer to retirement, you’ll start having a better idea on the money that you need to maintain your present standard of living. In case there are any bigger bills to pay like a new kitchen or travel expenses, don’t forget to count them in.
Adding to your Retirement income
The next step to take is to check whether or not your income will be enough to cover them. Returning to the 2-legged stool, let’s see what it takes to plan your retirement income.
When you’ve been working and paying towards your SS for minimum of 40 years, you can get an estimate of your benefits by leveraging the Social Security estimator. As you move closer to retirement, you can get accurate estimates. Keep in mind that the sooner you withdraw your benefits, the less amount you’ll get each month.
Apart from this if you have a pension coming in, the plan’s administrator can give you a projection of the amount that you’ll be eligible for when the time comes.
RETIREMENT SAVINGS What is the total amount of income that you can count from your retirement accounts like 401(k)s or IRA? Remember that 4% is the withdrawal rate and hence this is the amount that you can withdraw through thick and thin and still maintain the portfolio for the next 3 decades. You shouldn’t exceed this rate.