Goal: Retirement On Your Terms

How Much Do You Need to Retire?

It’s a very important question, and everyone’s answer will be different.

How do you figure out what you need to save in order to retire?

First, you need to estimate your expenses in retirement, as well as identify your income sources. You also need to predict how long you’ll live and whether you’ll have any costly health issues as you get older. (Hint: We’re afraid that’s likely.)

Just thinking about calculating all this makes me exhausted!

At Ellevest, we do a lot of this initial work for you. We project your salary, taxes and savings right up until retirement and use that amount as the starting point for your desired retirement income. We also assess whether the income sources and savings you’ve told us about will be enough to support your retirement. And we use the most recent life expectancy tables to determine your longevity. In general, women tend to live more than five years longer than most men, and that extra time means greater costs that you need to save more for.

Here are a few rules of thumb to keep in mind as you work out your specific number:

Aim for 100% replacement of your pre-retirement take-home pay.

This is a great place to start because you already know whether you make enough to cover your living expenses and support your desired lifestyle. You might have lower expenses in retirement since you may not have some costs like mortgage payments or work expenses. However, you might also incur higher health care costs or wish to spend more on travel and other leisure activities.

Multiply your ending salary by 10 to 15 to estimate the sum that will produce that level of income.

Because inflation will chip away at the value of your money, this number may be larger than you might think. Based upon the retirement income you think you’ll need, Ellevest determines the sum you should aim for in future dollars, which are adjusted for the impact of inflation.

Some checkpoints to make sure you’re on the right track to hit that goal: You should have saved the equivalent of your salary by age 35, three times your salary by 45 and five times by 55.

Each year, shoot to stash at least 10% to 15% of your annual income in your retirement accounts.

Ellevest recommends saving even more, at least 20% of your annual income, for retirement and other financial goals. That percentage includes your 401(k)’s employer match, if you have one. So if your company contributes 4% of your pay to the account, you only need to save another 6% to 16% yourself.

Of course, rules of thumb are only meant to give you ballpark figures and lead you to save more. Your specific situation may vary from these guidelines and is bound to change many times as you grow older.

For example, let’s say you’re 35 years old, making $80,000 a year and have $100,000 already saved for retirement. We recommend putting away 12% of your pay to retire by age 67. But if you anticipate having high-cost health issues as you age, we suggest bumping your savings up to 16% of your salary. Or if you want to retire earlier, say, when you’re 62 years old, we suggest saving 20% of your pay and planning for a more conservative lifestyle in retirement.

No matter your circumstances, one piece of advice that holds true for everyone: You need to start thinking seriously about saving for retirement as soon as possible—and having actual numbers to aim for can make doing so a whole lot easier.

Elle’s annual retirement income is our projection of her take home pay (salary net of taxes and savings) in the year prior to retirement, based upon her current salary and projected growth using a women-specific salary curve from Morningstar Investment Management LLC*. We assume she contributes 12% annually to her 401(k), which is invested in a low cost diversified portfolio that begins at 97% equity and becomes more conservative as she reaches retirement. In retirement, we assume an equity percentage of 42%. We used a Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios and savings rates through hundreds of different economic scenarios to determine a range of possible outcomes. The results shown reflect an 85% likelihood of achieving a retirement income amount of $103,745 per year, or better, and include the impact of taxes and inflation.

We assume Lucy contributes 20% annually to her 401(k), which is invested in a low cost diversified portfolio that begins at 96% equity and becomes more conservative as she reaches retirement. In retirement, we assume an equity percentage of 41%. We used a Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios and savings rates through hundreds of different economic scenarios to determine a range of possible outcomes. The results shown reflect an 85% likelihood of achieving a retirement income amount of $85,205 per year, or better, and include the impact of taxes and inflation.

We assume Rosie contributes 16% annually to her 401(k), which is invested in a low cost diversified portfolio that begins at 97% equity and becomes more conservative as she reaches retirement. In retirement, we assume an equity percentage of 42%. We used a Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios and savings rates through hundreds of different economic scenarios to determine a range of possible outcomes. The results shown reflect an 85% likelihood of achieving a retirement income amount of $113,745 per year, or better, and include the impact of taxes and inflation.

The results presented are hypothetical, and do not reflect actual investment results, the performance of any Ellevest product, or any account of any Ellevest client, which may vary materially from the results portrayed for various reasons. The results presented are not for any specific product and do not take into account specific product fees. Financial forecasts, rates of return, risk, inflation, and other assumptions have been used as the basis for the results presented.

*Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc.

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