Have you saved enough for your retirement? It’s not something anybody likes to really think about, but the harsh reality is that if you do not start planning for your retirement then you are leaving yourself at the mercy of others.
For this reason, it’s important that you start planning your pension pot, the sooner the better, as otherwise you will have to rely on the likes of the Retirement Insurance Benefits program and other Social Security programs if you haven’t saved enough for your retirement.
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While being proactive and planning for your old age can often ensure a more comfortable retirement that’s free from financial burden, it does pose the question of how much is enough? If you are thinking of making changes to your contributions or even wondering if you can afford to assume more risk with your investments, then it may be time to sit down and do some math. That way you can work out how much income your current pension pot will give you in retirement and whether you are on track and likely to hit those goals.
Of course, no two individuals are going to have the same needs and expectations for their retirement. However, regardless of whether you plan to settle in the country and enjoy the thought of tending to your garden, or dream of traveling to far-off countries, you will need a pension pot to draw on. The consensus is that in order for retirees to enjoy a good standard of living they should be aiming to have an annual pension that is about 80% of their pre-retirement income. Obviously, these figures are flexible but as you will no longer be making social security payments and paying income taxes when you leave your job—or paying out about 20%—the figure of 80% will let you carry on living in the manner that you are used to.
How large will you need your pension pot to be?
How large you will need your pension pot to be is hard to determine, though a recent survey of Americans found that many believed they would need a sum of $1.7 million to retire on in comfort (Source CNBC). Concerningly, this sum seems to be something of a pipe dream for many as a recent study by Fidelity Investments, a financial services firm that manages assets worth $11.8 trillion, revealed that the value of the average 401(k) plan in the US in 2022 had decreased to $121,710—quite a way off that goal of almost 2 million dollars.
It is important when planning for your retirement to not feel overwhelmed and remember it’s never too late to make positive decisions. If you feel that your retirement goals are unattainable then start small and talk to a financial planner; they are professionals who will help turn your financial dreams into reality.
The return on your investments, depending on the balance of your portfolio, will start at about 3.5% on the low end and can go as high as 10%. Obviously, one should always encourage caution and prudence when it comes to financial planning. But even assuming the low end of the scale at 3.5%, assuming you were born in 1987 with a current salary of $55,000 and make annual contributions of about $3,000, you will see your 401(k) grow to $216,814 by the time you hit 66. And if your contributions were the recommended 15% of your salary, aka $8,250 per annum, then your pension fund would be worth more than double that at $581,593.
The above figures are just examples. Estimating your returns is never an exact science but at least it helps give you an idea of what to expect and serves as rule of thumb to help you in planning your retirement pot.
In any case, it is important that you are realistic and not daunted by the goals you have set yourself. Sometimes you may be able to set aside more money for your pension fund, and other times it may be less. That’s just the nature of the beast, but regardless of what happens you should always be aiming to be proactively managing your fund and regularly checking the progress, whether it’s a 401(k) or Roth account.
Will you have enough for your retirement?
If you don’t currently have a pension or are thinking about moving your current pension, we recommend reading our Guide to Retirement Planning.