retirement savings

How Much of a Nest Egg Is Enough to Retire Comfortably?

a couple at the restaurant in Spain-to retire comfortably

Most people don’t have any idea how much they are going to need in retirement. It is an important question because your life changes the day you retire. You no longer have a salary that will pay your bills, and suddenly you are on your own.

At this point, you must know if what you have saved will be enough to live comfortably for the next 20 or 30 years. If the nest egg you have accumulated is too small, you might outlive your money.

When you calculate how much you need for retirement, you should match your retirement income to your expenses. For most people, it is easy to calculate retirement income especially for Social Security benefits. While it is harder to estimate your future expenses because expenses will vary depending on your lifestyle.

Until you have a good idea of what your retirement expenses will be and how they match to income, you cannot get a real number of how much nest egg you need for a comfortable retirement.

This article will help you get a better idea of how to calculate your nest egg so you can retire comfortably.

Step 1. Income

Do you know how much you have accumulated in savings and investments to quit your job and live a comfortable retirement?

Unfortunately, people tend to have a vague idea about their retirement income sources and overestimate how long their savings last.

The main sources of your retirement income will be:

Social Security. It is a proven fact that for many people Social Security is the main source of income in retirement. The average Social Security benefit in 2022 was only $1,550. Most people would find it tough to live on that paycheck alone.

If you do not know your number, just go to the Social Security Estimator to find out your number depending on the age you start collecting.

Pension. If you are lucky, a pension can be an enormous benefit because it produces predictable income from your employer.

Retirement accounts. Your 401(k), IRA, Roth IRAs, investments, and bank savings will generate income for you depending on how much you have saved.

Employment. If you choose to work in retirement, full or part-time, you can significantly increase your income number. A part-time job can make your retirement more comfortable if you did not save enough money.

Annuity. Many people are less worried about running out of money in retirement if they have a guaranteed lifetime income. You can turn some of your savings into lifetime income with an annuity. When you buy an annuity, you are exchanging a lump sum of money for a guaranteed lifetime income.

Should You Have an Annuity in Your Retirement Plan?

By the time you are 65, it will be hard to affect most of your income sources besides your job income. If your nest egg is small, you can keep working full-time, find a part-time job, or start a side hustle like Airbnb, blogging, etc.

Step 2. Expenses

Once you calculate your retirement income, you need to estimate your retirement expenses which will typically include fixed and variable expenses.

Look at how you spend your money today. Then take a piece of paper and divide every expense into categories (or buckets) which will allow you to see the big picture. At the end of the month, look at your categories and see how much you spend on each:

Housing (mortgage/rent, maintenance, property tax, property insurance, home improvement)
Utilities (gas, water, electricity)
Vehicle (insurance, maintenance, fuel, car loan)
Food (groceries, dining out)
Healthcare (out-of-pocket expenses, dental, eye exams, and glasses)
Insurance (health, life, liability)
Personal (clothes, education, personal debt, gym membership)
Entertainment (travel, cable, internet, books, memberships)

Keep in mind that your expenses will change in retirement. You have probably heard that you should plan to live on just 80% of your current spending after you stop working. But writing every expense now will help you have a better idea of what you will need in retirement and what you can cut out.

Once you know your sources of income and expenses, you can determine your nest egg number. The final number will be different for everyone. It depends on how old you are when you retire, how long you will live, and how well your investment portfolio will perform.

However, people tend to underestimate how long they live and what their medical costs will be. Also, people forget about unexpected expenses like car repairs, roof and furnace replacements, or financial help to family members.

Step 3. Compare your retirement income to expenses.

You have to have a good idea of what your retirement expenses will be and how they compare to your retirement income.

Consider yourself lucky if your retirement income sources are enough to cover your expenses when you stop working.

Unfortunately, most people’s income sources do not bring it enough to cover their retirement expenses.

Even though many expenses go down in retirement, inflation makes life more expensive for retirees. For most of us, the nest egg number has to be big enough to bring enough income otherwise we need to reduce our spending or adjust our retirement lifestyle.

If your current expenses are less than your income you have enough to retire. But if you do not, you need to figure out how to cover the gap.

For example, after calculating your Social Security, (pension if you are lucky) and a part-time job, your retirement income equals $35,000 a year. Your estimated retirement living expenses are $42,000 per year.

$42,000 – $35,000 = $7.000

The difference is a negative $7,000. This means that you need an additional $7,000 per year to maintain your retirement lifestyle.

How to cover this gap? The withdrawals from your nest egg should cover this shortfall. If you use the popular 4% withdrawal rule, you need to have at least $175,000 in retirement savings to cover the gap.

$175,000 x 0.04 = $7,000 a year

Step 4. How much is your nest egg?

How much of a nest egg you need in retirement depends on several factors.

The biggest factor is how much of your retirement income needs to come from that egg. If you have Social Security and a pension, your nest egg will be only used for additional income and big expenses.

But without a pension from your employer, Social Security will provide only a basic level of income. So, your nest egg (retirement savings) would be another source of income.

Ideally, Social Security and other guaranteed income sources should cover basic living expenses. And withdrawals from the nest egg should create enough cash flow to cover your other expenses.

A good starting point for many retirees and pre-retirees will be a well-known rule of thumb – the “4% rule”. According to experts, no matter how much you have saved, a 4% withdrawal rate will let you take money out of your nest egg for 30 years without fear of running out of money.

For example, if you want to get $20,000 per year from your nest egg, the account should be worth at least $500,000 when you retire.

$500,000 x 0.04 = $20,000 a year (1,666 per month)

Luckily, there are a lot of things you can do to fill that gap.

Step 5. Lifestyle

The lifestyle you plan to live will determine how much you need in retirement.

How expensive is your lifestyle? If you are planning to live in an expensive area, have a vacation home, drive nice cars and travel a lot – you will need more than $1 million saved.

But you can live comfortably with almost any budget if you match your expenses to your income. As I said before, it is hard to control income but there are many things you can do to lower your expenses.

Housing will be your biggest budget item. Housing costs as a percentage of spending will remain around 35% on average.

It is important to decide where you are going to live in retirement. If you plan to stay put and “age in place”, you should figure out how much it would cost to make your home senior-friendly. You should think about the costs of remodeling the kitchen, bathroom and stairs, and even maybe moving a master bedroom to the 1^st floor.

Aging Friendly Improvements for Every Home Remodeling Project

Also, if your housing expenses are too high you can downsize, sell your house, and rent, or move to a less expensive state.

If you are thinking of downsizing in the next few years, be realistic about what it will cost to buy something else and how much you will get for the sale of your house. Moving expenses and any kind of renovations big or small like new carpets at your new house will take money out of your nest egg.

Start watching real estate listings to get a sense of the market. If you are going to sell your home, start getting it ready for the market to avoid the last-minute rush.

Also, take time to think through what you really want your retirement to be. Do you want a small place where you can stay for up to 6 months and then travel for the rest of the year (my kind of dream scenario)? Would you rather have a bigger house for all of the family gatherings and for your kids and grandkids to visit?

You also need to plan for the unexpected. Many events typically come out of the blue. For example, you might have to start supporting a parent or a child, or some medical procedure needs to be covered out-of-pocket.

How Much a Nest Egg Is Enough to Retire Comfortably?

The answer is it all depends on your age, your goals, and your dreams.

The truth is that nobody can predict the future. If you want to retire in your 50s you will need to have a nest egg saved much bigger than if you want to retire in your 60s. And if you’re waiting to retire at 70, your number will be even smaller.

Look at your numbers, calculate your current cost of living and create a spending plan for the future. Then compare it to your retirement income based on different retirement age scenarios. It might take some time and hard work to get there. But knowing that you have enough money to live the life of your dream is incredibly satisfying.

Have you saved enough for a comfortable retirement?

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7 Essential Steps for a Mid-Year Financial Checkup

by Maggie Leave a Comment

It has been a turbulent year with the ongoing covid-19 crisis, a war in Ukraine, high inflation, and a volatile stock market.

If your finances are in a different place than they were at the beginning of the year, you are not alone. Also, if you are getting closer to retirement, you need to make sure your finances stay on track.

These 7 essential steps for a mid-year financial checkup will help you adjust your spending, increase your retirement savings, evaluate your debt and investments, gather important documents, and prepare your finances for the following months.

Step 1. Review your current budget and monthly spending.

Take some time to review your budget and monthly spending.

Have you been sticking to your planned budget, or you are overspending in some categories? Your life may have changed since the beginning of the year, and the mid-year checkup is a perfect time to adjust your budget accordingly.

How to start?

Look at your credit card and bank statements, see what expenses could be avoided, and plan to cut them by the end of this year.

Make sure to account for major life changes or upcoming big expenses that may change your financial needs such as retirement, a job change, relocation to another state, or purchasing a vacation home.

Keep in mind, that balancing your income with your spending is the key to saving more money.

By adjusting your budget, you will avoid falling into the overspending trap. Nobody likes to do budgeting. But a budget is an important part of your financial well-being. Therefore, take the necessary steps to stay on top of your finances for the rest of the year.

Step 2. Evaluate your retirement savings.

Savings is the lifeline to financial security. And yet, many people do not put enough time into managing their savings.

Financial experts recommend saving 10 to 15 percent of your income. However, it is so easy to miss this target. After you have adjusted your monthly budget, check your monthly and annual savings rate.

The first step is to look at how your retirement savings has stacked up. Have you maximized your retirement plan contributions? If your income has gone up during the past 6 months, have you increased your retirement contributions?

If you have not this year, make it a goal to increase your contributions to retirement plans such as 401(k), IRA, and Roth IRA next year.

The important thing to remember is that retirement plan contributions allow you to save a lot of money on current taxes and not miss any employer contributions.

When you are a few years away from retirement, being short on retirement savings can be a problem. A mid-year checkup helps you reassess your monthly expenses so you can make necessary adjustments to your spending.

If you have set up your savings rate at the beginning of the year, you will have another 6 months to make up for the lost savings.

How to evaluate your retirement savings?

Make an inventory of all your retirement accounts.

If you are getting closer to retirement, it is important to make an inventory of all your retirement accounts balances and contributions. It helps to see how much you have saved and how much you can withdraw from your retirement savings.

First, make a list of every retirement account you have. The retirement accounts should include 401(k) or 403(b), IRA, Roth IRA, or Roth 401(k). Then add account balance and current contribution.

Second, review how much you contribute to your current retirement savings plan. Have you maxed out your retirement savings for this year?

The 2022 contribution limits are:

$20,500 for 401(k) retirement plans. And if you are age 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $27,000.
$6,000 combined contribution for traditional IRA and Roth IRA. And the catch-up contribution for people aged 50 or older is $1,000. So, you can save up to $7,000 with your pre-tax money (IRA) and after-tax money (Roth IRA).

Even if you cannot max it out, see if you can increase your contributions even by 1 percent. Another option is to start reducing expenses in your budget, so you can put more money into your retirement savings.

Basics of Retirement Accounts

Step 3. Assess Your Debt.

The middle of the year is a great time to sit down and check your progress on paying down your debt.

A good piece of advice is to divide your total debt by your income. That ratio should get smaller over time as you reduce your debt. According to financial experts, your debt-to-income ratio should be zero by age 65.

Look at your mortgage, credit cards, car loans, or personal loans and make a list (if you don’t have one) of every single outstanding debt.

woman counting on calculator - a mid-year financial checkup

There are two strategic and popular methods to get out of debt faster.

The Avalanche method helps to reduce the debt that carries the highest interest rate. The Snowball method helps to get rid of debt with the lowest balance first, and then move on to the next lowest one.

If you are only 5 to 7 years before retirement, you should consider paying off all your debt before you retire including a mortgage. Getting into retirement with any kind of debt will put a significant burden on your lifestyle.

When you are working, you have years of earned income to pay a mortgage, credit card, student, or any other kind of loan. But once you retire, you will be living on a fixed income.

When you start living on a fixed income, it is hard to pay off debt if you need to pull big chunks of money from your savings. Although, big withdrawals from retirement funds could push you into a higher tax bracket.

To pay off all debt including a mortgage might not be realistic for everyone. However, the less debt you have, the better you are prepared financially for retirement.

Step 4. Look at your investments and rebalance your portfolio.

Things change all the time in the finance world, and it was no different in the last 6 months when the stock market was shifting.

We all noticed that it has been a volatile time for financial markets. If you have been afraid to look at your statements, it is time. A mid-year is a perfect time to look at your portfolio and review where your investments are.

Take the opportunity to review your asset allocation and make sure your portfolio is diversified and invested for growth.

You should have a mix of stocks, bonds, mutual funds, and other assets that fits your retirement goals. If the current market caused a shift in your portfolio, it needs to be corrected to maintain the diversification you originally planned.

If you do not automatically rebalance your portfolio, recent losses or gains may have pushed your asset allocation out of balance. Even though your portfolio has done well, you want to make sure you stay within your percentage goals.

It can be tempting to stay away from stocks to reduce the risk of losing money in your retirement funds. But stocks provide growth and investing for growth is important at this stage of your life. If you retire at 65 and spend 20 years in retirement, you need to have enough growth to make your money last that long.

You need to remember that a well-balanced portfolio will help you get through market downturns. Also, it will generate a retirement income to cover your living expenses.

How to Set Up Your Retirement Portfolio

Step 5. Check your emergency fund.

A solid emergency fund is helpful when financial troubles come your way. Most financial planners recommend having 3 to 6 months’ worth of living expenses to be tucked away.

The past two years of a global pandemic and current high inflation were hard on most of us. But these past years have shown how important it is to keep some money in a safe account, so you can cover your bills if your income stops.

It is a good idea to keep your emergency fund in a money-market account or other accessible account, so you know the money is right there if you need it.

Also, if you have depleted your emergency fund, make it a goal to re-build the fund in the next 6 months. One of the best things you can do in the remaining time of this year is to make sure you have an emergency fund.

Step 6. Check your estate planning documents.

Another essential part of a mid-year financial checkup is the status of your estate planning documents.

You should have the 4 essential estate planning documents: a will, a revocable living trust, a general durable power of attorney, and a health care proxy. If you do not have these documents, I recommend making an appointment with an estate planning attorney.

If you already have these documents, keep them up to date and make sure you have suitable executors, trustees, and guardians in place.

Also, make sure that the list of your beneficiaries is up to date as well.

If you have welcomed a grandchild to the family do not forget to add his/her name to the list. Additionally, if there has been a change in the family such as a marriage, divorce, or death, make sure to update your beneficiary list.

Step 7. Update your goals.

I encourage you to look at all your financial and retirement goals and see where you are.

Your goals might not be achievable if your life situation has changed. For example, if you plan to retire at 65, but you are short on retirement savings, you might have to continue working for a few more years.

Major life changes such as marriage, divorce or death, relocation, adjusting to new living arrangements, loss of job, etc. can have an enormous financial impact. A mid-year review can help you adapt your financial goals to reflect these changes.

Take some time to review your goals and determine if you are taking the necessary steps to achieve them. And if you ignored them for the first 6 months, now is the time to create a plan for the rest of the year.

You can create a new budget, reduce your expenses, increase your contributions, start reducing your debt, and a lot more.

Final thoughts

A mid-year financial checkup is a great strategy to help you stay on track with your financial well-being. It is easy to fall into bad spending habits, get off track with your budget, forget about your investments and ignore your financial goals.

But with a mid-year checkup, you can get a fresh start and set new goals. You still have plenty of time before the end of the year to reflect on your priorities and what you want out of life.

What is on your mid-year financial to-do checklist?

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How to Protect Retirement Savings During Coronavirus

by Maggie Leave a Comment

For the average American who is saving for retirement the latest economic and stock market news associated with coronavirus sounds terrifying. The coronavirus pandemic disrupted our daily lives and affected our finances.

For those who are close to retirement, the financial news is the most frightening. You have been saving for retirement for decades and seeing all your savings going down brings havoc to your retirement plans.

How to protect your retirement savings is the most important question for many baby boomers.

When the stock market is volatile as right now it is hard to say how long this rough patch will last. For those who are 20 or 30 years away from retirement, this market downturn should not cause major concern.

Eventually, the market will bounce back, and you will have time to recover those losses. But if you are near retirement and your retirement savings took a major hit you may want to postpone your retirement plans.

According to the Market Rates survey:

36.4% of Americans within 20 years of retirement expect the corona crisis will delay their retirement.
37% of Americans aged 45 to 64 don’t know what their investments are doing in this environment.
Of those who know where their investments stand, 43.8% of people in the 45 to 64-year-old age group reported losses of at least 10%.

For many baby boomers maybe, it is not the right time to retire now with the stock market being in free fall for many days. But it is a great time to review your plan and try to protect your retirement savings.

Adjust your retirement age and time you want to retire.

With the stock market down, unemployment high and the whole country in lockdown is hard to predict how soon our life will get back to normal. We do not know if the economy will recover fast or the country is heading toward a full-blown recession.

If you are 5 to 7 years away from retirement you still have time to protect your retirement savings by adjusting the time of your retirement. Unfortunately, you cannot change anything if you are already retired and watched your retirement savings shrunk.

However, if you are a few years away from retirement you should try to wait it out until the market is in better shape. This way you will have time to recover your losses and improve your retirement funds.

Do you know if you have enough saved for your retirement?

Look at your current savings and compare them with your financial goals. You maybe still able to retire on time if your savings are in good shape.

But what to do when you are behind on your savings or your savings have been hit hard? In this case, you maybe better off saving for a few more years and adjust the time when you can retire.

Don’t cash out your 401(k) savings.

coronavirus -a man holding US dollar banknotes

When the stock market is volatile, your first reaction is to protect your savings and pull all the money from retirement accounts. We all have that feeling when we watch the market being in free fall and expect the market will only get worse. We feel that it is the right thing to do by cashing out now before we lose any more money.

The truth is by cashing out now you can make a costly mistake. Because you cannot lose money until you sell your investments. When you sell your investment and the market is down, you will be locking in your losses.

The best thing you can do right now is to ride out the storm and wait for the stock market to calm down. As soon as the stock market starts to recover, your investments will rise in value as well. You will be happy to know that you are not missing out on all potential gains when the stock market starts to recover.

In addition to that, if you pull out money from your 401(k) and IRA accounts before age 59 ½, you will have to pay a 10 percent penalty fee and income taxes on the amount you withdraw.

Review your portfolio and adjust for risk tolerance.

a man and a woman at the table looking at laptop - adjusr retirement portfolio

Right now, it is a good time to look at your portfolio and see if you need to adjust it for your age and risk tolerance. When you get older you should modify your portfolio. More money should be invested in conservative investments like bonds, treasury notes and cash investments with less money invested in stocks.

In order to protect your retirement savings, you need to diversify your investments. Usually, investments are diversified based on asset allocation, your age and risk tolerance.

I am sure that most people set up their portfolios a long time ago and enjoyed the healthy market long run of the last decade. But recently things have changed so fast that most of us did not have time to adjust our portfolios to the new stock market environment.

However, it is not late to make some adjustments and protect your savings from future market dips. Make sure that your investments are diversified properly going forward.

If you are in your 50s think about your risk tolerance. Then decide how to allocate any new money going into your investments.

If you are in your 60s you should allocate more of your money in safe investments going forward. This strategy will allow you to keep your investments as safe as possible if the stock market will continue to fall in the future.

For several weeks I have not had the stomach to look at our portfolio and see how much money we have lost. But from the last recession, I learned the importance of having cash reserves at all times. Since then we keep 5 percent of our retirement savings in cash. It helps me to sleep through the night knowing that if things go bad and we lose our jobs we have quick access to cash. We call it our spending bucket. It helps to know that we have a temporary source of cash to pay the bills.

I would recommend keeping part of your money stashed in cash if you are close to retirement. Theoretically, you should have enough cash to cover a year of bills or even more. It should help to survive through the market downturn when you are not working.

Your spending bucket should be invested in safe assets like money market funds or short-term bonds that are not subject to big price declines. Savings accounts and money market funds are considered as cash investments. These are called cash investments because they are as good as cash. You can withdraw them at any time without penalty fee.

Don’t stop your 401(k) or IRA contributions

laptop, cup of coffee, Iphone, flower pot on the table

I think that many people drive themselves crazy checking 401(k) or IRA balance every day. It is hard not to do that knowing that the stock market is in bad shape due to coronavirus pandemic. In the current financial situation, it is tempting to cut back on your contributions because you want to protect your retirement savings. It is really easy to feel you are throwing good money after bad. None of these are good feelings.

But if you are able to keep your job it is smart to continue your contributions to 401(k) or IRA. Stay the course and when the market recovers, you will be glad that you did not miss the gain from that growth.

Some financial gurus even recommend boosting your retirement savings and contributions. Since the stock market is down you have an opportunity to buy quality investments at low prices.

On another hand, social distancing and lockdown measures make it hard for us to spend money on restaurants, concerts, sports events, or travels. When you are mostly confined to your home take that extra cash and add to your retirement savings.

If you are in your 50’s and planning to retire at full retirement age, you have 15 years or longer to contribute to your retirement funds. Time and compounding could still work for you over this time period. Therefore, keep saving and contributing money to your 401(k), IRA, and Roth IRA.

But if you are in your 60’s you have less time to recover your losses unless you want to postpone the time when you retire. Check out how much is your social security and decide if you can live off that paycheck before starts withdrawing money from retirement funds.

Article by Forbes: 6 Steps to Reduce Financial Fragility and Protect Retirement After Covid-19

Final Thoughts

Sometimes I feel that the entire world is in panic mode due to coronavirus spread. This health crisis has changed the way we live, work, and socialize. We put our lives on hold while watching the stock market crashed and our retirement savings shrunk.

However, I believe you can protect your retirement savings by adjusting your risk tolerance, asset allocation, and time of retirement. Continue contributing to your retirement funds as much as possible. By following these guidelines, you will be in a much better position to meet your retirement goals despite market conditions.

How do you protect your retirement savings during the coronavirus crisis? Share your thoughts with us in the comments below.

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Disclosure: This information is only educational. The intent if this post is to provide a simple guideline for an extremely complicated matter. I am not providing any specific financial advice or recommendations to any of my readers.