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The 70% rule for retirement savings is a useful guideline to estimate the income you may need in retirement. It suggests that you’ll require 70% of your pre-retirement, post-tax income to retire comfortably. This article will explain the 70% rule and provide tips for saving more for retirement.
The 70% rule indicates that you can estimate your future retirement spending by multiplying your post-tax income by 70%. For instance, if your current post-tax income is $72,000 per year, your estimated annual retirement spending would be around $50,400, or $4,200 per month.
Actual retirement spending varies for each individual. Factors such as debt, home ownership status, and lifestyle choices can influence this percentage. While the 70% rule is not a strict guideline, it serves as a starting point to help you assess if your retirement savings are on track.
To determine if you’re on track with your retirement savings, consider using age-based milestones. According to Fidelity, you should aim to have a certain amount saved by specific ages if you plan to retire by age 67. These milestones assume that 45% of your income will come from retirement savings, with the remainder supplemented by Social Security.
For example, if you’re a 40-year-old advertising sales agent earning $73,260 annually, you should have $219,780 saved for retirement. If you are promoted to sales manager by age 50 with a salary of $150,530, your retirement savings should be $903,180.
These milestones are targets and may vary based on lifestyle and cost of living changes. However, having a goal can help you stay on track.
You might wonder why the rule suggests 70% of your post-tax income rather than 100% or another figure. Several factors contribute to this:
If you want to increase your retirement savings, consider the following strategies:
Find out the contribution limits for your retirement accounts and increase your regular contributions if possible. Use extra money from cash gifts and bonuses to boost your savings. Automating contributions can help you stay consistent with less effort.
If your employer offers a 401(k) match, contribute at least enough to get the maximum match. This is essentially free money for your retirement. Ensure you understand the vesting period to avoid forfeiting matched contributions if you leave the company early.
Consider opening an individual retirement account (IRA) to make additional tax-free or tax-deferred contributions. You can contribute up to $6,500 annually, with an extra $1,000 if you’re 50 or older. There are two main types of IRAs:
If you’re 50 or older, you can make additional catch-up contributions to your retirement savings. For 2023, the catch-up limits are:
Withdrawing money from your retirement savings can hinder your progress. You’ll miss out on potential interest earnings, and early withdrawals may incur a 10% penalty and taxes. Avoid withdrawals before age 59½ for traditional IRAs and age 65 for 401(k)s unless they qualify for an exception.
Estimating your retirement spending can be challenging, but using the 70% rule can help set a savings goal. Don’t be discouraged if you feel behind. Consistent contributions and looking for opportunities to save more can help you build a substantial nest egg over time.
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