Achieving your retirement dreams will not happen by accident. In order to live the retirement lifestyle you dream about, you will have to start saving. Your company’s 401(k) plan can be one of the best tools available to help you build the kind financial future you hope for.But retiring successfully will take more than cashing out and telling your employer you are not coming in anymore. You need an end-to-end plan that will get you through a time period that may well measure in decades.
Here is an often-misunderstood retirement concept:
Being ready to retire is not necessarily about how much money you have in your 401(k). The more important factor is how much sustainable income you will be able to generate from your plan and other sources.
So, how much will you need?
There is no precise answer to this, of course, but the financial industry in its wisdom has come up with a basic rule of thumb to help you determine how much income you will need in retirement. It’s called the “80% rule”.
Simply put, the rule suggests retirees should anticipate needing about 80% of their pre-retirement income after they retire in order to maintain the same standard of living they’re used to. It is typically the case that some expenses shrink (such as expenses related to children and such), while other expenses are higher. A good rule of thumb in netting these higher and lower expenses is the 80% rule.
The number varies slightly depending on who you ask, but the 80% figure is a surprisingly good starting point for the average American. Figure out what 80% of your current income is, then adjust this figure up or down according to your plans, recognizing that your retirement plans might include:
- Travel. Ambitious plans to travel will require a much larger budget.
- Hobbies. A potentially expensive hobby could also require significantly more income.
We might suggest that, if you are like most Americans, maximizing an employer-sponsored 401(k) plan will be key to a prosperous retirement.
Consider checking out our library ofShelton 401(k) Educational Videos to help you make good choices and stay on a good retirement track.