When people think about retirement they imagine white sand beaches, naps in a rocking hammock, and an ability to do whatever they want each and every day. But the only way to achieve that goal is to save enough money to live the life you want. No one wants four years of retirement bliss followed by 25 years of trying to scrape by on Social Security. Download the Retirement Planning Calculator and make sure you won’t outlive your money!
According to a 2016 GoBankingRates study, 56% of Americans have less than $10,000 saved for retirement. One-third of Americans have no retirement savings at all! With life expectancies rising, this is a recipe for disaster.
Things to consider when saving for retirement
In the Roadmap to Financial Health, I discussed the basics of saving for retirement by starting early. But even if you start early, you need to know how much to save. One-size-fits-all rules like everyone needs $3 million in assets to retire are effectively useless. They aren’t based on your spending habits, goals, or investment strategy.
The Retirement Planning Calculator will estimate how much you can expect to earn in retirement. It utilizes where you are starting from today, your savings goals, and your expected returns. When looking at the calculator, focus on these key variables.
- Target Retirement Age: Think about when you would ideally like to retire. Remember that if you want to retire before 59 1/2, you will need savings outside of typical retirement funds. You have to pay a 10% early withdrawal penalty to take money out of a 401(k) or IRA before you are 59 1/2.
- Expected Annual Raise: Inflation is typically 2% and employers will typically keep your salary at least in line with inflation. However, if you are early in your career, I suggest picking a slightly higher number. While you won’t get a promotion every year, you will see periodic step ups which will move your average annual raise higher.
- How much you want to save?: This is based on a percentage of your pre-tax income. 10% is typically the minimum recommended savings rate, with 15% a safer level.
- The Retirement Planning Calculator includes employer match towards your savings goals. If you want to save 15% of your income, but you have 3% employer match in your 401(k), the calculator will assume you are only making 12% personal contributions to your various retirement accounts.
- Expected Annual Return: The long-term average return of the stock market, adjusted for inflation, is almost exactly 7%. However, remember your asset allocation. Most likely you shouldn’t be in 100% stocks and bonds have lower average returns. I typically assume 4%-5% returns to be conservative and make sure Daddy Fish and I have the money we need in retirement.
- Withdrawal Rate: Your withdrawal rate is the percentage of your savings you expect to withdraw each year of retirement to live on. This is a static number, so if you have $1 million saved for retirement and are using a 4% withdrawal rate, you will take $40,000 out each year to live on.
- Withdrawal rate is largely based on life expectancy and how long you need your money to last in retirement. A 4% withdrawal rate has become the rule of thumb for retirees. Research has shown that there has not been a period of time when a 4% withdrawal rate would deplete a retirement account in less than 33 years.
- When altering the withdrawal rate in the calculator, take a look at the chart on the value of your retirement accounts over time. It will show you how much you can expect to have still saved at each age.
As you play with the Retirement Planning Calculator, move these key variables around to see how it changes your retirement income results. Determine a plan that seems reasonable to you, and stick to it!
Download the Retirement Planning Calculator
You can get the password to my freebie library that has ALL of my free resource files, including the Retirement Planning Calculator in it by filling out this form:
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Are you on track for a comfortable retired life? What percentage of your income are you saving? Let me know!
This post was proofread by Grammarly.
This is a great spreadsheet, I love it. I don’t contribute to a Roth because my post FIRE tax rate will be lower than what is now during my earning years. This spreadsheet gave me the validation:) I plan to still convert all my traditional to the Roth over a long period of time without paying taxes so I feel like this is another form of income. I don’t understand why FIRE bloggers still promote contributing to a Roth over traditional or over the 401K (after company match) during peak earning years.
Awesome that it validated your choice! It makes perfect sense to me to use a traditional IRA over a Roth if you are doing FIRE. I think the FIRE community likes that you could access your Roth investments before 59 1/2 if need be, but since people doing FIRE probably have taxable accounts and other assets it doesn’t make a lot of sense to me to tap your retirement accounts early anyway.
My wife and I are on track for retirement. We have been saving 65% for the past two years and hope to ramp it up to 70% this year. We are working hard to diligently get to FIRE as soon as possible 🙂
70% is huge! That is amazing! We have never done more than a little over 50% pre-tax. Now I’m wondering what other expenses we can cut…