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How Much Do You Need for Retirement?
Planning for retirement always raises a lot of questions. How much will
I need? How much do I need to save? How much will Social Security pay?
Unfortunately, the answer to all these questions depends upon each individual’s
unique circumstances. Instead of specific answers, let’s focus on general information.
You will need to replace a minimum of 70% of your working income for retirement. For most people this will come from Social Security and either an employer-sponsored pension or individual retirement account (IRA). Company pensions which have a defined benefit based on the number of years an employee worked are becoming less common. They are being replaced by contribution plans where both employee and the employer contribute toward a retirement fund.
Social Security benefits are based on a sliding scale which gives lower-income individuals a higher percentage of replacement income than those with higher incomes. For example, an individual who has income of $20,000 will receive a benefit from Social Security equal to 51.4% of his income, but an individual earning $60,000 will receive a benefit equal to 33.4% of income.
Obviously, if the goal is 70%, the lower-income individual is closer to reaching that goal.
People often wonder what the most critical factor is when saving for retirement. The rate of return is important, but it is not the most critical factor. It is very important that you take enough risk to reach your goal. Many choose to be too conservative for fear of having negative returns. The critical factor in saving for retirement is time. Starting early will lower the amount you need to save on a monthly basis.
Consider three individuals who are 25, 35, and 45 years of age who will each receive 40% income replacement from their Social Security benefits. They each need to invest in such a way that their retirement savings will replace the remaining 30% so that they will reach the minimum goal of 70% of their income in retirement. Each of the individuals is investing the same way and earning an average return of eight percent. The 25-year-old will only need to save four percent of his income. The 35-year-old, who has waited 10 years longer to start, will need to save 6.8%; and the 45-year-old will need to save 14.2% since he waited even longer to start saving.
Those who start late saving for retirement do have options. Besides increasing the amount they save, they can also take more risk and invest for a higher return. Unfortunately, when you have fewer years before retirement, this strategy can prove costly if the economy experiences a severe downturn close to your retirement date. Another option is to work beyond normal retirement age. Waiting until you are 70 will raise your retirement benefit from Social Security by over 30% and add years to accumulate more in your retirement account. The key to saving for retirement is to start early and to be consistent.
Brown on Green is a regular column written by Free Will Baptist Foundation Director David Brown. The column offers financial advice, addresses hot-button business topics, and answers your finance questions. Contact David with your questions.
For more information about Social Security, or to download an online retirement guide, visit the following