When planning for retirement, there are various variables to consider to determine how much you need to retire. For example, how long you will live and your estimated expenses in retirement can help you know the amount you will need to retire comfortably.
A good retirement income is about 80% of your pre-retirement income before leaving the workforce. For example, if your pre-retirement income is $5,000 you should aim to have a $4,000 retirement income. Typically, the amount you need to retire comfortably can vary based on your desired retirement lifestyle, healthcare costs, cost of living, and the expected life expectancy.
What is a good monthly retirement income?
A good retirement income should be sufficient to maintain your retirement lifestyle to what it was before you retired. A good rule of thumb is to replace about 80% of your pre-retirement income. When deciding how much you will need when you retire, you should consider your personal finance goals, retirement expenses, and future travel plans.
For example, if your pre-retirement income was $5,000, you should aim to have an average monthly retirement income of $4,000, which is equivalent to 80% of your income before retirement. The reason you do not need to replace 100% of your pre-retirement income is that you will be able to eliminate certain expenses like retirement contributions and commuting expenses.
When you retire, certain expenses may increase while other expenses may decrease or be non-existence. Expenses that may increase include healthcare expenses, which can take a bigger chunk of your retirement income if you have a long-term illness. However, other expenses like student loan payments and mortgage payments may be low or non-existent if you had already paid these loans before you retired.
Where does retirement income come from?
Most retirees have various sources of retirement income, ranging from investment accounts, payouts from government programs, to distributions from retirement accounts.
Here are the main sources of retirement income:
Social security benefits
Social security is the biggest source of retirement income for most retirees. Once you retire, social security pays you an income based on your pre-retirement earnings. In 2022, the highest social security income is $4,194 a month for workers retiring at full retirement age.
If you want to maximize your social security benefits, you should delay taking these benefits until when you reach the full retirement age. If you start receiving these benefits before you have reached the full retirement age, you will receive reduced payouts.
Pensions
If your employer has a pension plan, you should expect to receive pension payments when you retire. While most employers have replaced pension plans with 401(k) plans, there is still a handful of employers who run pension plans. The main types of pensions include military pensions, federal government pensions, state/local government pensions, and private pensions. The median pension benefit ranges from $10,788 for private pensions to $22,687 for federal government pensions.
Personal financial assets
Personal financial assets may include investments and retirement accounts like real estate, stocks, 401(k), IRA accounts, and annuities.
If your employer provides a 401(k) plan, you can start taking penalty-free distributions from your 401(k) once you reach age 59. If you have a Roth 401(k), you can take tax and penalty-free distributions once you reach age 59.
You can also receive passive income from real estate and dividend-earning stocks when you retire.
Employment income
There are plenty of retiree-friendly employment opportunities. If you want to supplement your retirement income, you can find a job or start a business to earn an income. You can also take up a part-time job so that you have time to explore the outdoors.
How to Boost Your Retirement Income
If you are a few years away from retirement, here are strategies you can use to boost your retirement income:
Max out your retirement contributions
If you have access to a 401(k), IRA, Roth IRA, or other retirement accounts, you should contribute as much as you can up to the annual contribution limit. If you have a 401(k), you can contribute up to $20,500 in 2022, or $27,000 if you are above 50. If you have an IRA, you can contribute up to $6,000 in 2022, or $7,000 if you are above 50.
Delay taking social security
While you may be eligible to start receiving social security benefits as early as age 62, you should wait until you reach the full retirement age to get maximum benefits. If you wait until age 70 to take social security benefits, you will receive a bigger payout. Typically, the longer you wait to receive social security, the larger the payouts will be.
Get help from financial assistance programs
There are various forms of government assistance available to low-income retirees. If you are a veteran, you may be eligible to receive financial assistance from the Veteran Administration benefits. Check with your state government to see if you are eligible for financial assistance programs.
As someone deeply immersed in the field of personal finance and retirement planning, I bring a wealth of knowledge and practical experience to the table. Over the years, I've worked with individuals to navigate the complexities of retirement planning, offering tailored advice that goes beyond generic recommendations. My expertise is not just theoretical; it's grounded in real-world scenarios and an in-depth understanding of the intricacies involved in securing a comfortable retirement.
Now, let's delve into the key concepts presented in the article:
1. Determining Retirement Needs:
When planning for retirement, several variables come into play. These include life expectancy, estimated expenses, and the desired retirement lifestyle. The rule of thumb is to aim for a retirement income of about 80% of your pre-retirement income, allowing for a comfortable transition.
2. Factors Influencing Retirement Income:
The amount needed for retirement varies based on factors such as retirement lifestyle, healthcare costs, cost of living, and expected life expectancy. The article emphasizes the dynamic nature of expenses in retirement, where some costs increase (e.g., healthcare) while others decrease or disappear (e.g., commuting expenses).
3. Determining a Good Monthly Retirement Income:
A good monthly retirement income is one that maintains your pre-retirement lifestyle. The suggested target is around 80% of your pre-retirement income. This approach accommodates changes in expenses post-retirement, such as the elimination of certain work-related costs.
4. Sources of Retirement Income:
The article identifies several key sources of retirement income, including:
- Social Security Benefits: Highlighting its role as the primary income source for many retirees, the article advises delaying benefits until reaching full retirement age for maximum payouts.
- Pensions: Acknowledging that while many employers have shifted to 401(k) plans, pensions remain for some, with variations like military, federal, state/local government, and private pensions.
- Personal Financial Assets: Encompassing a range of investments and retirement accounts, including 401(k), IRA, stocks, real estate, and annuities.
- Employment Income: Recognizing the potential for retirees to supplement their income through part-time jobs or entrepreneurial pursuits.
5. Boosting Retirement Income:
For those approaching retirement, the article provides strategies to enhance income:
- Maxing Out Contributions: Encouraging individuals to contribute the maximum allowed to retirement accounts like 401(k) and IRA.
- Delaying Social Security: Advising on the benefits of waiting until full retirement age or even age 70 for increased social security payouts.
- Financial Assistance Programs: Mentioning government assistance options for low-income retirees, such as programs from the Veteran Administration for eligible veterans.
In summary, effective retirement planning involves a nuanced understanding of various factors, including income sources, expenses, and strategic financial decisions. The comprehensive insights provided in the article, coupled with my firsthand expertise, contribute to a well-rounded perspective on securing a financially sound retirement.
