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How Much Do I Need to Retire? Retirement Planning 101

https://youtu.be/O3nkFyTNtjw

00:00:00
Hi! I'm Kirsten from The Motley Fool.

00:00:03
In this FAQ, we're going to answer a question everyone wants to know — how much money do I need to retire? First of all, it's great that you're asking yourself this question.

00:00:17
Having enough for retirement doesn't just happen. It's a coordinated effort.

00:00:21
That effort is easier if you have a goal in mind. So, how much money do you need to retire? The real answer is that it's different for everyone, but let's start with the general rule and break down how that can vary.

00:00:32
Most studies agree that in order to retire, you will need about 12X your annual salary at retirement age. If that sounds like a lot, that's because it is.

00:00:40
That's why it's so important to save — or, as I like to think of it, paying your future self.

00:00:46
If that number sounds intimidating, let's look at all the ways you can build up to that.

00:00:49
First of all, that total amount you need for retirement does include Social Security.

00:00:54
Most people have been paying into Social Security a little bit with each paycheck every year that they work.

00:01:00
If that's you, you can expect to receive a monthly benefit check in retirement.

00:01:04
To maximize your monthly check, there's a couple of things you can do.

00:01:07
One, make as high a salary as you possibly can. You were probably already doing that one.

00:01:13
Two, work a full 35 years, because that's how many years the Social Security Administration is basing your benefits on.

00:01:20
And, as a bonus, if you're making a higher salary toward the end of your career, which is quite common, you can work more than 35 years to increase your monthly Social Security benefit check. Three, delay retirement.

00:01:33
We here at The Motley Fool like to say that 70 is the new 65 when it comes to retirement age.

00:01:38
For more details on calculating your expected monthly Social Security benefits and how to optimize that check, check out the link in the description below.

00:01:45
But even then, Social Security will not cover all that you need in retirement.

00:01:49
In its benefit overview document, the Social Security Administration makes it clear — Social Security was never meant to be the only source of income for people when they retire.

00:01:59
It is designed to replace a percentage of your income, depending on how much you earn.

00:02:03
For very low earners, Social Security can provide up to 75% of your retirement needs.

00:02:09
For medium earners, about 40%. For high earners, about 27%.

00:02:14
The rest of your retirement funds will come from whatever you have saved, so it's important to make sure you are saving.

00:02:20
The best place to start, if it's available to you, is an employee savings plan.

00:02:24
Most commonly, this is a 401(k). If your employer offers one, make sure you're using it.

00:02:30
This is a tax-advantaged account for saving, meaning you don't have to pay any taxes now on the money you contribute to this account.

00:02:37
Plus, according to the Bureau of Labor Statistics, roughly half of companies offer a 401(k) match, up to an average of 3%.

00:02:44
That means, as an example, that if you contributed 3% of your paycheck to this account, your employer will match it with another 3%. That's free money.

00:02:52
Make sure to save at least enough to get the full employer's match.

00:02:56
Ideally, a solid personal savings goal is 15% of your paycheck, including any company match.

00:03:02
If your company will match up to 5%, you should personally sock away 10% of your paycheck into your workplace retirement account, for a total of 15% saved.

00:03:12
By the way, if you don't have a workplace plan, you can still save in an individual retirement account, an IRA; or, if you're self-employed, you can use a solo 401(k).

00:03:21
The beauty of all these retirement accounts is that your money grows in two ways.

00:03:26
First, it will grow as you steadily contribute to it each month.

00:03:30
But second, all the money in your account will be invested and will grow all on its own through the magic of compounding interest.

00:03:36
For a quick example, investing $3,000 per year for 40 years at an annual rate of 8% yields over $750,000 come retirement time.

00:03:46
That may be enough for people with a relatively low cost of living, but it might not be close to enough for folks that head into retirement with a lot of expenses.

00:03:54
That's why it's also important to think about the money you have going out when you're making your retirement plans. Maybe you had children who had since moved out of your home. Consider downsizing.

00:04:04
If you live in an expensive area, consider moving somewhere with a lower cost of living. Maybe even move to a state with no state income tax.

00:04:12
That means fewer taxes on Social Security benefits, 401(k) withdrawals, and other retirement income.

00:04:17
There's a reason Florida is such a popular retirement destination.

00:04:20
There isn't a one-size-fits-all answer to how much money you need to comfortably retire, but understanding the 12X income rule, realizing that Social Security is just a part of the retirement picture, and adjusting expenses will put you on the path to finding the right figure for yourself. Thanks for watching, everyone! If you have any thoughts on the topic or have any future topics you'd like to request, drop a comment below.

00:04:43
If you want more help getting started, check out our investing starter kit. It's free. You can find it over at fool.com/start.

00:04:51
If you enjoyed this video, give us a thumbs up and subscribe to get more content like this from The Motley Fool. Fool on! hi I'm Kirsten from The Motley Fool in this FAQ we're going to answer a question everyone wants to know how much money do I need to retire first of all it's great that you're asking yourself this question having enough for retirement doesn't just happen it's a coordinated effort and that effort is easier if you have a goal in mind so how much money do you need to retire the real answer is that it's different for everyone but let's start with a general rule and break down how that can vary most studies agree that in order to retire you will need about 12 times your annual salary at retirement age if that sounds like a lot that's because it is that's why it's so important to save or as I like to think of it paying your future self but if that number sounds intimidating let's look at all the ways you can build up to that first of all that total amount you need for retirement does include Social Security most people have been paying into Social Security a little bit with each paycheck every year that they work if that's you you can expect to receive a monthly benefit check in retirement to maximize your monthly check there's a couple things you can do one make as high a salary as you possibly can okay you were probably already doing that one but to work a full 35 years because that's how many years the Social Security Administration is basing your benefits on and as a bonus if you're making a higher salary toward the end of your career which is quite common you can work more than 35 years to increase your monthly Social Security benefit check three delay retirement we hear the Motley Fool like to say that 70 is the new 65 when it comes to retirement age for more details on calculating your expected monthly Social Security benefit and how to optimize that check check out the link in the description below but even then Social Security will not cover all that you need in retirement in its benefit overview document the Social Security Administration makes it clear Social Security was never meant to be the only source of income for people when they retire it is designed to replace a percentage of your income depending on how much you earn for very low earners Social Security can provide up to 75% of your retirement needs for medium earners about 40% for high earners about 27% the rest of your retirement funds will come from whatever you have saved so it's important to make sure you are saving the best place to start if it's available to you is an employee savings plan most commonly this is a 401k if your employer offers one make sure you are using it this is a tax advantage to account for saving meaning you don't have to pay any taxes now on the money you contribute to this account plus according to the Bureau of Labor Statistics roughly half of companies offer a 401k match up to an average of 3% that means as an example that if you contribute 3 percent of your paycheck to this account your employer will match it with another 3% that's free money make sure to save at least enough to get the full employers match but ideally a solid personal savings goal is 15 percent of your paycheck including any company match so if your company will match up to 5 percent you should personally sock away 10 percent of your paycheck into your workplace retirement account for a total of 15% saved by the way if you don't have a workplace plan you can still save in an individual retirement account an IRA or if you are self-employed you can use a solo 401k the beauty of all these retirement accounts is that your money grows in two ways first it will grow as you steadily contribute to it each month but second all the money in your account will be invested and will grow all on its own through the magic of compounding interest for a quick example investing 3 thousand dollars per year for 40 years at an annual rate of 8% yields over 750,000 dollars come retirement time that may be enough for people with a relatively low cost of living but it might not be close to enough for folks that head into retirement with a lot of expenses that's why it's also important to think about the money you have going out when you're making your retirement plans maybe you had children who had since moved out of your home consider downsizing if you live in an expensive area consider moving somewhere with a lower cost of living maybe even move to a state with no state income tax that means fewer taxes on Social Security benefits 401k withdrawals and other retirement income there's a reason Florida is such a popular retirement destination there isn't a one-size-fits-all answer to how much money you need to comfortably retire but understanding the twelve times income rule realizing that Social Security is just a part of the retirement picture and adjusting expenses will put you on the path to finding the right figure for yourself thanks for watching everyone if you have any thoughts on the topic or have any future topics you'd like to request drop a comment below and if you want more help getting started check out our investing starter kit it's free you can find it over at fool comm slash start if you enjoyed this video give us a thumbs up and subscribe to get more content like this from the motley fool full on

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