How Much Retirement Income You Need to Live Comfortably

Good Retirement Income
Good Retirement Income

Saving for retirement is perhaps the most major financial goal every American has. But once you retire, you’ll need an adequate income to replace what you were making pre-retirement. As you might imagine, this number will vary from person to person, since we all have different lifestyle plans for retirement. While Social Security will help quite a bit, it won’t get you entirely through retirement. That’s why retirement income planning and having a goal number in mind is so important.

Retirement planning, whether that’s starting the process or putting the finishing touches on a plan, can be made easier with the help of a financial advisor.

What Makes a Good Retirement Income?

The rules for what makes a viable retirement income vary from expert to expert. However, the vast majority of them recommend something around 75% to 80% of your pre-retirement income. This can include all sources, such as 401(k)s, IRAs, Social Security, part-time jobs and more.

The key, however, with retirement income planning, is ensuring that you don’t over-withdraw from your retirement accounts. Failing to do so could bring the sustainability of your retirement into question, which is something you don’t want to worry about later in life.

Another major factor to account for is your healthcare needs. If you’re retiring early or are generally in good health, you may consider setting aside less for healthcare and Medicare. This could leave you open to either saving more for the future, or having a less cost-restrictive retirement for now. On the flip side, if your healthcare needs are substantial, you’ll want to be incredibly diligent with accounting for that.

Average Retirement Income

Almost nine out of 10 people over the age of 65 receive Social Security benefits. According to the Social Security Administration (SSA), it makes up around 33% of the elderly population’s income. However, unmarried elderly individuals are much more likely to depend heavily on their benefits than their married counterparts.

The SSA estimates that, as of April 2022, a retired worker receives an average of $1,666.49 per month in Social Security. Remember that this amount is only designed to supplement your retirement income. While many Americans depend on it in varying degrees, it is typically not enough on its own.

The U.S. Census Bureau conducted a Current Population Survey published in 2020 that reflects the most recent data from 2019. It reported that Americans 65 years and older have a median income of $55,836. The survey bases the income on sources like wages, nonfarm self-employment, public assistance, interest and dividends and Social Security.

While costs of living vary, that may not be enough for you, especially if you have medical concerns or dependents. It also leaves things tight for activities, like vacations and trips to see family.

Factors to Help Calculate a Good Retirement Income for You

Everyone works with a different amount of income during their retirement. The total you end up working with depends on several factors. Here’s a few for you to consider:

How much will you spend in retirement?

You may have a particular goal in mind with your retirement. Perhaps you want to live the same type of lifestyle you always have. Or, may you want something a little more luxurious. Overall, your retirement plan should accommodate the financial freedom that reasonably fits your wants and needs.

But creating a goal or estimating how much you’ll need isn’t always easy. In that case, you may want to consider the 80% rule of thumb. With this, you need at least 80% of your before-retirement income to support yourself. It’s lower than your full income because you won’t have to worry about certain expenses anymore. For example, a retiree doesn’t pay payroll taxes toward Social Security, contributions to their retirement plan or have to worry about costs like commuting expenses.

The 80% isn’t fixed, though. It’s just a guideline. Once again, think about the life you want to lead in your golden years. Older individuals often want to travel in that time, which is an expense. Alternatively, they may have a health condition to pay for or dependents to support. Plan out enough to accommodate both types of spending.

How much will your savings earn in retirement?

Good Retirement Income
Good Retirement Income

It depends on the type of investments you’re making. Still, it’s hard to predict exactly how much your savings will earn over the upcoming years. One way to make a guess is to look at long-term historical returns. For example, according to Morningstar, the average nominal stock return has been relatively consistent. They averaged around 10.85% in nominal returns from 1950 to 1979 and approximately 11.81% from 1980 to 2019.

However, that is just one type of asset investment and does not really show year-to-year fluctuations. And you can’t use one asset’s success to predict another’s. Your portfolio likely won’t have all your funds in one individual investment. Therefore, the rate of return depends on your retirement plan and how much money is in it.

You can’t control the returns of your portfolio. But strategizing your asset allocation, risk tolerance and time horizon will help you get closer to your goals.

What is your life expectancy?

Unfortunately, the question “how long will I live?” is up in the air for most us. While we will never really have a straight answer, averages can help us guess. According to estimates from the SSA, an average male can expect to live around 18.1 years once he hits age 65. In contrast, the SSA projects the average woman to live approximately 20.7 years more after age 65.

However, it’s important to remember that these numbers are guesses based on data. Reviewing your and your family’s health history will give you a stronger idea. For example, think about any congenital conditions or predisposed diseases you may have once you get older. Or, look at your physical health until now. Both of these can have a significant impact on your longevity.

Overall, though, you don’t want to leave your financial planning up to chance. It’s better to choose a generous age and stick with it. That way, you have some cushion.

What is your withdrawal rate?

This is an age-old question. One of the most common answers you’ll get is 4%, which came from the Trinity Study. This number comes from a 1998 study conducted by three finance professors from Trinity University. The premise of the study is that a portfolio with 50% equities and 50% fixed-income securities should sustain annual withdrawals of 3% to 4%. This rate of withdrawal should support a reliable passive income that can last decades.

Tweaking the 4% rule for your situation will yield better results, though. For example, try being conservative in your withdrawals when you can. Also, delaying your retirement will allow you to maximize your Social Security benefits.

Simple Ways to Boost Your Retirement Income

Saving money sounds simple, but there are many ways to go about it. While nothing beats early saving, you can catch up with the right approach if you fell behind. Here are some tactics that can help you boost your retirement income:

  • Set goals, such as when you want to retire and how much you’ll need.

  • Start saving as soon as possible to take advantage of interest.

  • Make contributions to your 401(k) if you are eligible.

  • Meet your employer’s 401(k) matches.

  • Make catch-up contributions if you’re over the age of 50.

  • Put your savings into accounts automatically so that you add regularly to your funds.

  • Pull back on spending where possible.

  • Open an IRA, traditional or Roth.

  • Store extra funds rather than splurge now.

  • Wait to collect Social Security benefits until your full retirement age.

Bottom Line

Good Retirement Income
Good Retirement Income

Whether you want to spend your retirement relaxing on sandy beaches or in a cozy urban apartment, you’ll need to plan ahead. Knowing the financial benchmarks you need to achieve for your goals will help make the transition easier. Those benchmarks are your withdrawal rate, expected spending, nest egg’s estimated earnings and life expectancy. Know that there is no perfect way to save for retirement. Most of the planning depends on your personal situation. Don’t worry about keeping up with your neighbors or anyone else. A good retirement income supports your unique dreams.

Tips for Boosting Your Retirement Savings

  • You can have a plan for retirement but still feel stuck. Maybe you don’t know where to start, or you aren’t sure if it’s enough. If you need help with your financial goals, consider speaking to a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • In addition to your Social Security benefits, a well-funded retirement should have sufficient savings. Look to see if you are on track with our retirement calculator. Although, your savings will only stretch so far according to your lifestyle. Try our cost of living calculator to get a clearer picture of the type of income you’ll need in the future.

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