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Many financial advisors suggest that in order to retire, you should aim to replace 70-90 percent of your pre-retirement annual income. While this is a good place to start, this is a general rule that doesn’t take into account your personal financial journey. Before you calculate how much you need for retirement, there are multiple things to consider.

What age will you elect to start receiving Social Security?

When you turn 62 years old, you can start receiving Social Security benefits. You might be obliged to wait a couple years until you reach full retirement age so you can get the full amount of your benefits. Full retirement age is between 65 and 67 years old depending on when you were born.

How much will you receive from Social Security?

It’s a widely-known myth that Social Security is designed to replace 40% of your pre-retirement income. Many people have a blind belief in this statement, and while it’s not untrue, it’s not 100% accurate either. The way Social Security determines your average monthly pay is through a complex calculation that takes into account your 35 highest earning years plus other income multipliers. There’s no guarantee that it will cover exactly 40% of your income.    

How much money are you currently saving each month?

In addition to Social Security, the income that you use in retirement will also come from savings. Because Social Security usually only covers about 40% of your income, it’s not a good idea to rely on Social Security alone. You should also be setting aside your own money to save for the future. Calculate how much you can comfortably save each month and put it into a savings account.

Do you have any Investment Retirement Accounts (IRAs)?

If you have a 401(k), 403(b), 457(b) or IRA, then you’re well on your way to saving for retirement. Use the current balance of your accounts when calculating your retirement goal. Also consider any employer matches that your accounts are receiving.

What will your monthly retirement costs be in retirement?

It was recently reported that “older households” spend an average of roughly $3,800 a month. This is where many people underestimate. Be realistic about how much money you’ll spend per month in retirement. Think about your personal retirement vision and consider how your spending habits might differ in retirement.

By estimating your monthly retirement expenses, you can work backwards to determine how much you’ll need to save. First, multiply your estimated monthly expenses by 12 to get your annual expenses. Then multiply that number by 20. For example, if you estimate you’ll spend $40,000 a year, then you’ll need to save $800,000 before you retire.

Divide that number by the number of years you have left to retire. That’s how much you should save each year. Then divide that by 12 to calculate how much you’ll need to save each month.

Need help getting your retirement plan on track? Set up a meeting with a financial partner at Sterling Advisor Group. For more information on retirement strategies that are right for you, contact us today at (480) 729-8000.