This is the big question for many people who are thinking about retiring or are suddenly faced with forced retirement. How do I know I have enough for retirement? The sooner that you prepare for retirement the better off you will be, but how do you know when you have enough?
We all get accustomed to living on the salary or income that we make and this is probably a good starting point. This is the quality of life you are used to and the life style you have been accustomed to. So why not start there. We compiled the following points from reviews we have done looking at various posts and ideas from many sources. If you cannot meet these requirements, then you will have to take steps to either adjust your income in some manner or you will need to downsize your expectations. We will discuss each one in a little more detail.
- 15.7 times salary saved
- Less 2 for social security
- Less 2 for defined benefit plan
- Or can you live on 5% of income from your savings
- Some say2% or 4% of income from savings
- Can you Still work
- What will you do with your time
How do You Know You Have enough for Retirement
15.7 times salary saved
This is a standard that many financial planners are working with and it is a good measure to start with. The big assumption is that you want to maintain your current lifestyle. So if your current income is $50k per year, then you need $750 to $800 k in savings to ensure that you will have the income you need. Start at this level when calculating if you have enough for retirement.
Less 2 for social security
You can also make adjustments to this figure if you will receive social security. The common rule of thumb is to reduce the ratio from 15.7 to 13.7 if you will receive social security and decrease the overall savings that you need to have.
Less 2 for defined benefit plan
The lucky few who will have a defined benefit retirement plan can reduce the ratio a further two points. This is a combination of benefits for medical as well as retirement income from a pension plan. Many people are losing their benefits due to layoffs and downsizing. If you are near retirement, you need to evaluate the probability you will actually see these benefits when you retire.
Or can you live on 5% of income from your savings to have enough for Retirement
Another way to look at the question of whether you have enough for retirement is to ask your self if you can live on 5% of the income from your savings. For example if you have $500,ooo saved, can you live on 5% or $25,ooo a year. If you can make more than this consider it a bonus!
Many people would have difficulty living on this amount, however if you can add social security and a defined benefit plan to this, it may not be so bad.
Some say2% or 4% of income from savings
The question of whether you can live on 5% of income from your savings really depends on whether you can actually make 5% or not. Some say that the average income is actually much lower at somewhere between 2% to 4%. What this really means is that you really need to have a lot more in savings if your savings is only generating 2% income every year.
Take a really hard look at what income you can generate from your savings. Be conservative in your assumptions. The stock market has been very volatile over the past few years so be careful with investments and the income assumptions you make. If reality is better than what you assumed, then it will be a bonus to you in your retirement years.
Can you Still work
Either way, whatever you assume, working full or part time during retirement years has a lot of benefits. Not only do you have the extra income which you may need after doing some of the calculations, you will have the opportunity to be challenged, to meet new people and contribute to your community.
These benefits will provide you with a more complete life and help you live longer as well.
What will you do with your time if your do not have enough for Retirement
As we mentioned in the last paragraphs, you will be busier and you will fill the time you have available if you work. The bottom line is to figure out what you will do with all of the free time you gain once you finish working full time and depending on your decision, the amount of money you will need as well.
Visiting family, looking after the grand children is far different than traveling the world on cruises. Many people who have traveled a lot have come to the realization that while traveling is nice, spending time with family and friends is much more rewarding.
For many the challenge is to find the right mix of family, travel and budget ! Do you have enough for retirement?