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The vast majority of workers fall far short of the amount of money they would need to retire. Your retirement depends on multiple factors surrounding your current lifestyle, and if you are willing to downgrade your lifestyle once you’ve retired. Retirement planning will require that you can maintain up to 30 years at your current lifestyle before your death.

Looking Ahead

To allow proper retirement planning, you need to understand how the system for retirement works. Over the course of your working life, you will pay a specific percentage of income into several possible types of retirement accounts. Each of these accounts will purchase investments which build wealth on your behalf. At the end of your working life, you will retire and withdraw a specific amount of income each month, until your death. This will replace your working income. At your death, any leftover funds will be given to your beneficiaries, which may be your children, spouse, relatives, or others selected by you.

After your retirement, you’ll require less annual income than your working years. This reduction occurs due to reduction or elimination of work-related expenses, transportation expenses, savings necessity, and other lifestyle changes. Most people will see a decrease of approximate 10% to 30% of their expenses. This reduction in expenses only occurs if you scale back your costs when you retire. If you replace this income with lavish retirement expenses, you may be worse off in the long run.

Planning Withdrawals

Your retirement’s comfort level will depend on your withdrawals per year. After retirement, you won’t earn new income except for dividends, capital gains, royalties, and other forms of investment returns. You’ll slowly withdraw money from your investment accounts and incoming capital gains or dividends. The more you withdraw per month as personal spending income, the faster money will diminish. The less money per month you withdraw as income, the longer it will last. The best amount is the low single digits: between 3% and 5% per year. Selecting a 3% withdrawal rate will result in roughly 30 years of retirement income. A 4% withdrawal rate would result in roughly 25 years of retirement income. A 5% annual withdrawal rate will result in 20 years of retirement. You’ll have more comfort spending more money, but you will also use it faster.

In short, you need to have enough saved to last until death at your withdrawal rate. Each year must pay 70% to 90% of your expenses while you were working. Calculate 70% of your annual expenses, and multiply that number by the amount of years you will live after you retire. Ensure that a 3% withdrawal rate is enough for you to sustainably live on. You will also continue to receive interest after your retirement, but due to market fluctuations, you should not rely on that income. If you’re using a 70% ratio, see the equation below. If you’re using a different number, replace the .70 with that number.

Planning Your Lifestyle

The higher your income, the more money you’d need to actually retire and maintain your lifestyle. You should increase the amount of money you set aside if this is the case. If you’re living a high expense lifestyle, remember to save a substantial portion of your income for when you retire. If you don’t, your expenses could result in you working to live right up until your death.

Program Sponsors

There are a lot of programs that assist you with your retirement planning and savings. These programs split into two major categories, based on their sponsor. Employer-based retirement programs are hosted by your personal employer directly, typically provided as a benefit. You have the option to use these programs. Another sponsor is the US government, which promotes several programs that you directly pay into. Most of these accounts are tax advantaged, which means that you pay pre-tax income into these plans and defer taxation until withdrawal. Your pre-tax savings compound until retirement. Accounts made with after-tax currency, also known as “Roth” accounts, allow you to pay with taxable earnings and make tax free withdrawals when you retire.

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