Know your goal
Generating enough retirement income to live comfortably requires a large pot of money. But how much do you actually need to save? To set the right goal, you need to know how much income your savings will produce at retirement.
For many years, retirement experts suggested you’d need as much as 70% of your working income to retire comfortably. But current thinking has shifted. Many experts now say you can retire comfortably on 50% to 60% of your working income. This assumes you are done with mortgage payments, saving for retirement and supporting your children. If you currently earn $40,000 per year, that means retiring on $20,000 to $24,000 per year.
So, how much savings does it take to generate a retirement income of $20,000 for 25 years? Using the Retirement Calculator on the Silver Thatch website (link to www.silverthatch.org.ky), the answer is about $250,000. This assumes your savings will earn a 7% return on investment throughout your retirement. If your return is lower, you’ll need a bigger nest egg. For example, assuming a 6% return, you’ll need about $275,000 to generate an annual income of $20,000 for 25 years. If you think you’ll live longer than 25 years, again, you’ll need even more.