Will Your Retirement Income Be Enough?

A 2020 poll from Schwab Retirement Plan Services found that the typical 401(k) participant believes they will need $1.9 million to retire, a 12% increase from the prior year’s survey.1

Obviously, a lot of people in the U.S. are not investing enough to accomplish that savings goal–and the income it brings.

To discover if your retirement income will be sufficient, you need to start with estimating your retirement expenses.


  • To know if you will have sufficient income in retirement, begin by estimating what your expenses should be in retirement.
  • As well as your Social Security benefits and conventional retirement (if you have one), the four percent rule states you are likely to spend about 4 percent of your savings annually.
  • If your retirement income will not be sufficient to cover your costs, find a way to increase your income, reduce your expenses–or both.

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Retirement Expenses

There are numerous formulas to estimate retirement expenditures, all of which are rough guesses at best. 1 well-known rule is you will need about 80 percent of the amount spent going into retirement.

That percentage is based on the fact that some significant expenses will decrease in retirement–commuting costs and retirement-plan contributions, to mention two. Needless to say, other expenses may go up (holiday travel, such as –and, inevitably, health care ).

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Many retirees report their costs in the first couple of years not only equal to but occasionally exceed what they spent working. 1 reason for this is that retirees simply may have more time to go out and spend money.

It is common for retirees’ expenses to go through three different phases:

  1. Higher spending early on
  2. Small spending for a long period then
  3. Higher spending near the end of life, because of long-term or medical maintenance expenses

Many couples find that they spend the most money in both the early and the last years of retirement.

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Standard of Living

Needless to say, future expenses are tough to predict. However, the closer you are to retirement, the better idea you likely have for how much money you will need to sustain your current standard of living–or encourage another one.

If you use that as a foundation, subtract any expenses you anticipate will disappear after you retire, and add in any new ones. That will provide you at least a ballpark figure to work with.

If you expect any big bills (more traveling, a brand new kitchen), make certain to count those in, too. Same for any significant cost-savers–for instance, if you’re planning to downsize and move to a less expensive house.

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How Much Do I Need to Retire?

Many financial advisors boil this down response to a single rule of thumb, at least as a starting point: the 4 percent sustainable withdrawal rate.

Basically, this is the amount that can theoretically withdraw through thick and thin and still expect your portfolio to last at least 30 years. Not every specialist today agrees that a 4 percent withdrawal rate is best, but most would argue you need to try to not transcend it.

If you adhere to the 4 percent rule, here is how much you can withdraw annually from three different nest eggs:

  • $500,000–$20,000 annually
  • $1 million–$40,000 annually
  • $2 million–$80,000 annually

To work out how much income you will need in retirement, take your estimated monthly expenditures (be sure it is realistic) and divide by 4 percent. So, by way of instance, if you estimate you will need $50,000 a year to live comfortably, you will need $1.25 million ($50,000 ÷ 0.04) entering retirement.

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Retirement Income

Now that you have some idea of your retirement expenses, the next step is to check if your income will be sufficient to cover them. To do so, add up how much income you expect to receive from three key sources:

  • Social Security retirement benefits
  • Defined-benefit retirement programs
  • Retirement savings

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Social Security Retirement

If you have been working and paying into the Social Security system for at least 40 quarters, or 10 years, you can find a projection of your Social Security retirement benefits by using the Social Security Retirement Estimator.2 The closer you are to retirement, the more accurate the estimate is very likely to be.

Keep in mind that the sooner you take benefits, the less you will find monthly. You can elect to take benefits as early as age 62 or as late as age 70, and there is no additional incentive for waiting because you will get the complete amount whether it’s age 70 or greater.3

In June 2020, the average Social Security retirement benefit was $1,514 per month.4 The most you can receive is dependent upon your age when you begin collecting benefits. For 2021, the maximum monthly benefit is:

  • $3,895 in Case You file at age 70
  • $3,113 if you file at full retirement age (66 and 10 months if you document in 2021)
  • $2,324 if you document at age 625

Defined Benefit Plans

In case you’ve got a retirement coming to you from your current employer or a former one, the program’s benefits administrator can provide you an estimate of how much you will get when the day comes.

In case you’ve got a spouse, you will want to consider your likely income under different situations, like taking benefits in the form of a joint and survivor annuity, which continues to offer a predetermined percentage of your benefits to your partner if you die first.

Retirement Savings

Retirement savings include all you have stashed in your 401(k)s, IRAs, health savings account (HSAs), and other accounts you’ve earmarked for retirement.

In case you’ve got a traditional IRA or 401(k), then you must begin required minimum distributions (RMD) at age 72. Notice that Roth IRAs–and Roth 401(k)s–have no RMDs during your life. Those RMDs will determine the monthly income you get from those accounts as soon as you reach age 72.6 However, you should begin earning money out of an IRA or 401(k) as early as age 591/2 with no punishment.7

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Your Personal Bottom Line

Therefore, once you add it all up, if your overall retirement income exceeds your called expenses, then you probably have”sufficient” for retirement. It would not hurt to have more, of course.

But if it looks as if you are going to fall short, you might have to make some alterations and discover ways to boost your income, lower your costs, or both. For example, you can:

  • Work a few more years, if that is an option
  • Raise the portion of your pay that you put aside for retirement
  • Adopt a more aggressive investment plan
  • Cut back on unnecessary spending (always a good choice)
  • Downsize into a smaller, cheaper home

The sooner you do the math, the longer you will need to make the numbers work in your favor.

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Saving vs. Investing

It is worth noting that nearly two-thirds of the participants at the Schwab study believed themselves savers as opposed to investors.1 That is a posture that may lead to lower yields and retirement account balances.

Generally speaking, people save money to buy things and for emergencies. The money is there if you need it and it’s a very low risk of losing worth –along with little potential gains.

Investing, on the other hand, is performed with long term aims in mind. When you invest in money, you have the potential for greater long-term yields, but with more risk. The secret is to find the balance between risk and reward, according to your risk tolerance and time horizon.

Savings Rates: What’s Enough?

While it’s great to have a dollar amount as your long-term savings target, it is helpful to concentrate on just how much you should sock away every year.

Ten percent is the historic recommended savings rate. Schwab further refines this to state that if you begin in your 20s, you can retire with a 10% to 15% savings rate.8 Here is how a few scenarios could play out for a future retiree.

5 percent Retirement Savings Rate

Let us assume that Beth, a 30-year-old, makes $40,000 a year and anticipates 3.8% increases until retirement at age 67. Further, using a diversified portfolio of bond and stock mutual funds, Beth anticipates a return of 6 percent annually on her retirement gifts.

With a 5 percent savings rate during her working life, Beth will have saved $423,754 by age 67. If she needs 85 percent of her pre-retirement income to live on and receives Social Security, then her 5 percent retirement savings are significantly short of the mark.

To match 85 percent of her pre-retirement income in retirement, Beth needs $1.3 million at age 67. A 5 percent savings rate does not put her savings at even 50 percent of the funds she will need. Clearly, a 5 percent retirement savings rate is not enough.

10% and 15% Savings Rates

Keeping the above mentioned assumptions about her wages and expectations, a 10% savings rate yields Beth $847,528 at age 67. Her projected needs stay the same at $1.3 million. So even in a 10% savings rate, Beth dominates the quantity of her savings that are preferred.

If Beth pumps up her savings rate to 15%, she’ll reach the $1.3 million amount. Adding in expected Social Security, her retirement will be financed.

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Does this mean that people who don’t save 15 percent of the income is going to be doomed to a sub-standard retirement? Not necessarily.

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Conservative Assumptions

Like any future projection situation, we have made some assumptions. Investment returns could be higher than 6 percent annually. Beth might live in a place with a very low cost of living, where housing, taxes, and living expenses are under the U.S. averages. She might need less than 85 percent of her pre-retirement income, or she might decide to work until age 70. Her salary could grow faster than 3.8percent yearly.

All these optimistic possibilities would net a larger retirement fund and reduced living expenses in retirement. Consequently, in a best-case situation, Beth could save less than 15 percent and have a sufficient nest egg for retirement.

Imagine if the initial assumptions are too optimistic? A more pessimistic scenario involves the possibility that Social Security payments may be lower than they are now. Or Beth might not continue on the identical positive financial trajectory. A quarter of the participants at the Schwab study, as an instance, had taken a loan from their 401(k) with the majority of them carrying out more than 1.1

Alternatively, Beth might reside in Chicago, Los Angeles, New York, or another high-cost-of-living area where expenses are much greater than in the rest of the nation. With these gloomier hypotheses, even the 15% savings rate may be inadequate for a comfortable retirement.

Measuring Your Needs

If you have reached mid-career without saving as much as these numbers say you ought to have put aside, it is important to plan for additional savings or income flows from now on to compensate for the shortfall.

As an alternative, you could plan to retire someplace with a lower cost of living to make your money last longer. You may also plan to work more, which will augment your Social Security benefits, in addition to your earnings. And bear in mind, your Social Security benefit will be greater if you wait until your entire retirement age to accumulate. And it’ll be even higher if you delay until age 70.5

If you’re searching for a single number to be your retirement nest egg target, you will find guidelines that will assist you set 1 . Some advisors recommend saving 12 times your yearly salary. Under this rule, a 66-year-old $100,000 earner would require $1.2 million . However, as the prior examples indicate –and the future is unknowable–there is no ideal retirement savings percent or target number.

The Bottom Line

Certainly, planning for retirement isn’t something you do soon before you stop working. Rather, it is a lifelong process. During your working years, your preparation will undergo a series of phases. You will evaluate your progress and goals, and make decisions to ensure you reach them.

A successful retirement is dependent not just on your ability to save and spend wisely but also in your ability to plan. How much income you will need in retirement is difficult to understand and catchy to plan. But one thing is for sure. It’s much better to be overprepared than to wing it.

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