After graduating college, most people usually look forward to starting a family, buying a car, and getting their first home. At this age, most people are young and healthy, so life after retiring and health issues never come to mind. As people get older, however, they start thinking about retiring. In the late 30s to mid-40s, many people usually get into a midlife crisis as they come to terms with the realities of life. This is also the time, that most people often start investing seriously. They become risk-averse and more aggressive with their savings to save enough money to live a comfortable life after retiring. Unfortunately, many people do not know how to accurately calculate the income they will need after retiring. The following are tips on estimating your retirement income needs.
1. The Three-Quarter Rule
The general rule of thumb is to target an income of 75% of your pre-retirement income. If you expect to retire in the next few years, and you’re currently earning $100,000 annually, you should put your financial house in order to ensure you earn at least $75,000 after retiring. This is because most expenses will not be there after retiring. For instance, you’ll not have any mortgage obligations, your car will be paid for and any loans would have been settled. After all, lenders usually approve car loans, personal loans, and mortgages after considering the age of the lender, so you’ll be free and clear of all debt obligations when you retire. That is why it’s reasonable to estimate your income after retiring to be three-quarters of your average annual income.
2. Adjustment for Inflation
When saving and investing, you must always consider inflation. The buying power of your money after saving for decades must be taken into consideration. After all, if your investment can only offer you a 3-4% rate of return, inflation may erode all the gains you make. As a result, you will only get back your accumulated savings adjusted for inflation, without any significant interest payments.
3. Reduced Expenses After Retiring
After retiring, most of your expenses will reduce. For starters, you will not be paying payroll taxes. Secondly, you will not need to make any savings from any income you may earn. Thirdly, the income tax rate applicable on income earned after retiring is likely to be much lower. This means that you will require less money to continue enjoying the quality of life you are accustomed to once you retire.
4. Social Security Benefits
If you expect to receive social security benefits of $28,000 after retiring, and your current annual income is $100,000, you will have to figure out how to raise $47,000 annually from savings and investments to ensure you have a total of $75,000 in annual income, which is 75% of annual income before retiring. You should target to have a nest egg of $1.15 million. By making a withdrawal of 4.7% annually, adjusted for inflation, you’ll be earning $47,000 annually from your investment.
5. Health Issues
As you get older, you may become susceptible to age-related illnesses. This means that your medical expenses may increase. Therefore, you will have to increase your provisions for medical expenses. It also helps to have a valid medical insurance policy.
How to Invest for a Brighter Future
i) 401k and IRA Plans
The Roth IRA, traditional IRAs, and the 401k scheme are the safest options for investing for life after retiring. These are saving schemes provided by employers for their employees. They come with strict limits on monthly contributions and the benefits are clearly defined.
ii) Bank Savings
Fixed deposits earn a compound interest over a given period. After exceeding the contributions limit of the 401k or IRA, you can open a fixed deposit account for a fixed term. This will provide you with a regular income even after retiring.
iii) Annuities
Insurance companies have medium-term and long-term investment products for individuals and organizations. You can buy annuities before and after you retire to ensure you continue earning a decent income.
iv) Treasuries
Government bonds are usually the safest investment vehicles for both individual and institutional investors. They provide higher yields and are guaranteed by the government, so there is zero risk involved.
