Planning for retirement? Get to know the 70% rule used to save for retirement and decide if it works for you!
Have you thought about how much money you actually need to save for retirement in order to live comfortably? This is a question many people stumble upon. Did you know that are different answers to that question, and one of them is the 70 % rule, but do you know what it is?
Learn more about the 70% rule, a popular guideline that offers a starting point for estimating your retirement income needs. Also, if you want to check out more financial tips on our website, you can click on this link!
What is the 70 % Rule For Retirement?
The rule suggests that in retirement, you’ll likely need around 70 % of your annual post-tax income, pre-retirement, to maintain your standard of living. This rule of thumb assumes that your expenses will decrease upon retirement. You’ll no longer have work-related costs like commuting or professional attire. Additionally, your mortgage might be paid off, freeing up a significant chunk of your monthly budget.
How Does the 70% Rule for Retirement Work?
- Calculate Your After-Tax Income: figure out how much income you have after deducting taxes;
- Multiply By 12: this gives you your annual after-tax income;
- Multiply By 70%: this provides an estimate of your potential retirement income needs.
For example, if your annual after-tax income is $75,000, the 70 % rule suggests you might need roughly $52,500 per year in retirement, or $4.375 per month. While this rule is a helpful starting point, it’s important to note that it isn’t the definite answer, at the end the right amount will depend on your desired lifestyle and goals. Here are some things that you should consider:
- Your Lifestyle and Goals: do you envision extensive travel or a more low-key approach? Factor in potential hobbies and activities you plan to pursue;
- Healthcare Costs: healthcare expenses tend to rise as we age. Consider potential long-term care needs and how you’ll manage them;
- Location: the cost of living varies significantly between regions. Factor in housing costs, groceries, and other expenses in your desired retirement location;
- Debt: existing debt can significantly impact your retirement budget. Aim to pay off high-interest debts before retiring;
- Social Security Benefits: while not a guaranteed source of income, Social Security can contribute to your retirement income stream.
How Much Should I Save for Retirement?
To evaluate if you’re saving enough for retirement, Fidelity offers a guideline based on your age and income. The recommendations bellow are based off of the assumption you plan to retire at 67, with 45% of your retirement income coming from your savings and the rest from Social Security.
- Age 30: save an amount equal to your annual salary. For instance, if you earn $45,000 a year, you should have $45,000 saved;
- Age 35: save twice your annual salary. If your salary is $60,000, aim to save $120,000;
- Age 40: save three times your salary;
- Age 45: four times your salary;
- Age 50: six times your salary
- Age 55: seven times your salary;
- Age 60: eight times your salary;
- Age 67: ten times your salary.
How To Save Money For Retirement
- Start Early: the power of compound interest is remarkable. Starting to save early, even with smaller amounts, allows your money to grow exponentially over time;
- Increase Contributions Gradually: as your income grows, consider increasing your retirement savings contributions proportionately;
- Reduce Expenses: analyze your budget and identify areas where you can cut back. Every dollar saved today translates to more money for your future self;
- Know Your Options: there are different types of retirement plans available, get to know more about them and choose the one that suits you better;
- Automate Your Savings: set up automatic transfers to your retirement accounts. This removes the need for willpower and ensures consistent contributions towards your future;
- Utilize Employer Matching: don’t miss out on free money! Contribute enough to your 401(k) to maximize your employer’s matching contribution. You can ;
- Explore Catch-Up Contributions: if you’re 50 or older, the IRS allows you to make additional “catch-up” contributions to retirement accounts to accelerate your savings;
- Consider a Side Hustle: A side hustle can provide additional income that you can direct towards your retirement savings;
- Review Your Budget Regularly: track your spending and identify areas where you can cut back. Every dollar saved today translates to more money for your future self.