3 Steps to Figure Out How Much You'll Need to Save for Retirement
How much money will you need to retire? If you’re like most people, you have no idea! This can be incredibly stressful, especially if you’re counting on your retirement savings to sustain you throughout your golden years. However, it’s important to understand that figuring out how much money you need doesn’t have to be difficult, and in fact should be fairly straightforward once you set yourself up with the right retirement planning tools.
Figure out how much you’ll need to save for retirement at your target retirement age (65 if you’re aiming to retire in 2045, which means you can start saving now). For example, if you want to have $1 million by age 65, you’ll need to save $4,166 per month, assuming an average annual rate of return of 7%.
Step 1: Know where you stand
To help determine how much you need to save each month, take a look at your current finances—work with your bank or do some research online. Go into detail about stocks and trading. For example, in stocks: Are you currently paying down any loans? What kind of savings accounts do you have? What's your investment account balance? What's your average monthly income from work (including bonuses)? Do you have any other sources of income that aren't being included here?
Step 2: Take stock of your options
You can use your pre-retirement income to contribute to a 401(k) or other retirement accounts, but some people prefer a Roth IRA. If you’re self-employed and can open an individual retirement account (IRA), then that could be a smart option as well. The point is, there are many options and trading off each of them will help determine what you need to do when it comes time to retire. Of course, start saving now!
Step 3: Estimate your future lifestyle
Once you’ve figured out how much money you’ll need, you can figure out how much of it will come from your retirement account and how much will have to come from other sources. Trading income sources could help lower your tax burden.