Retirement is one of the most significant financial goals people face. You need enough to live comfortably for several decades while minimizing your tax burden and potentially leaving behind wealth for your heirs. As a result, it can take time to determine how much you need to save. There are many factors to take into account. This article will explain how much money you may need to retire, then dive into a few tips for saving more for retirement.
How to figure out how much you need to retire
The exact amount you need to retire depends on several factors, such as:
- When you plan to retire
- Your desired lifestyle
- Your retirement investments
- Your work plans, such as working part-time in retirement
- Your location
- Your Social Security benefit size
- How much wealth you want to pass down
All that said, a general rule of thumb is to save enough to withdraw 80 to 90% of your pre-retirement income per year. Another general rule that can work is to save 10 to 12 times your final full-time working year’s annual salary. For example, if you earn $100,000 in your last year, you may want to aim for $1 million to $1.2 million.
It may be smart to err on the side of too much retirement savings as long as you have enough to continue living comfortably now. Having more than you need allows you to enjoy retirement more or pass more wealth down, whereas having less can restrict many of your choices.
Tips to save more for retirement
Here are a few ways you can save more for retirement:
Open an IRA
Workplace retirement plans tend to offer matching bonuses, which is free money. However, these plans limit your investment choices as well. After hitting that matching bonus, you may want to open an Individual Retirement Account (IRA)
These retirement accounts let you invest in almost any conventional assets, such as stocks, bonds, and mutual funds. You can open them at various banks, brokerages, and online financial institutions.
There are two types of IRAs. Traditional IRAs let you make pretax contributions and enjoy tax-deferred growth like workplace retirement plans. However, withdrawals in retirement are taxed at your ordinary income rate, and you must take Required Minimum Distributions (RMDs) starting on April 1 of the year you turn 73.
As a result, traditional IRAs can potentially work well if you earn a lot now and plan to live on a lower income in retirement. You save more on taxes now, allowing you to invest much more for retirement.
Roth IRAs are the opposite. Contributions are not tax deductible, but your assets grow tax-deferred and qualifying withdrawals are tax-free in retirement. Therefore, Roth IRAs can work well if your income is lower no, but you plan on living a more expensive retirement lifestyle. You pay lower taxes on your low income, and then you can withdraw much more money in retirement without owing taxes.
Get life insurance with cash value
Life insurance with living benefits, such as a life insurance retirement plan (LIRP) or other permanent life insurance policies with cash value, can be an excellent financial tool for saving for retirement and covering expenses. Part of each premium goes into your life insurance’s cash value growth component, which grows tax-deferred at a specified rate.
Once you save enough cash value, you may withdraw or borrow from it at favorable terms, depending on the policy you have, which can offer a significant source of savings. Y ou get your full cash value minus surrender charges if you ever need to surrender your policy.
Some policies, like universal life insurance, let you pay your premiums with cash value when it grows enough. This can help you fit your coverage into your budget or even eliminate your premiums — allowing you to enjoy peace of mind at an affordable rate.
Cutting expenses is one of the simplest ways to save more for retirement. The less you spend, the more you can contribute to your retirement accounts and other investments. It also makes purchasing life insurance easier.
Subscription services are a great place to start since it’s easy to continue paying for forgotten subscriptions . Cutting these or downgrading your subscription tier puts money back into your pocket each month. After that, you can audit the rest of your expenses and see if there are any you can reduce or eliminate
Save enough for your desired retirement lifestyle
The amount you need for retirement depends on several factors, so every situation is different. However, a good starting point is to save enough to withdraw 80 to 90% of your pre-retirement income each year or to save 10 to 12 times your final full-time year’s annual income.
S etting aside that much can sound daunting, but there are many ways to accelerate your savings. Traditional IRAs help you save more now with tax deductions so you can have a larger nest egg in retirement, whereas Roth IRAs reduce your taxes in retirement to let you enjoy more of your wealth.
A life insurance policy can also help you afford retirement or even retire early, thanks to living benefits like cash value. And cutting your expenses now frees money you can use to purchase life insurance, save more in retirement accounts, plus pursue other retirement savings methods. Ultimately, working with a financial advisor is also a good idea. They can help you identify your retirement goals and create a plan to get there.