Retiring on $4 million might sound like a dream, but it can also be a realistic goal if you have the right planning in place. A financial advisor can help you build a plan for your retirement needs.
A common rule of thumb is that you need enough savings to replace at least 70% of your pre-retirement income. This figure takes into account inflation and the possibility that you might need more income in retirement than you did before retiring.
How Much Money Will I Need?
Retirement planning is a lifelong process, and you’ll need to save money throughout your working years. The amount you need will depend on several factors, including when you plan to retire and the goals you have for your retirement.
Many financial planners suggest saving at least 10-12 times your final year’s salary. This strategy can help you make sure you have enough cash set aside to maintain your lifestyle in retirement.
You also need to consider how much your health care costs will rise in the years after you stop working. This can be difficult to estimate, but it’s important to have a general idea of your needs and expenses to start.
To estimate how much you’ll need in retirement, many financial experts use the 4% rule, which says you should withdraw about 4% of your savings each year to support your desired standard of living. But this calculation assumes you have 30 years to spend, which may not be appropriate for all retirees.
Passive Income Options
Passive income is a term that refers to the earnings from investments or other assets that don’t require you to be hands-on. It can include rental income, income from a business, stock dividends and royalties.
In retirement, passive income can be a very important factor in your ability to have a stress-free lifestyle. This is because it allows you to live on what you earn and not worry about whether or not the market is up or down.
One of the best ways to generate passive income is through real estate investment. This can be done through REITs or by buying properties directly.
Another type of passive income is through writing and self-publishing a book. This can be a very rewarding pursuit for people who are creative and enjoy working independently.
In addition, investing in bonds can also provide a good source of passive income. Bonds typically pay interest income and are designed to preserve capital while paying out full value at maturity.
Taxes
Whether you’re just starting to plan for retirement or you’ve already made it a reality, the taxes you’ll pay can be a major factor in your budget. For some people, the difference can be tens of thousands of dollars each year.
The good news is that there are many states that offer tax breaks for retirees. These can include a substantial tax deduction for retirement income and friendly tax rates on things like property, sales and your estate.
For instance, California is one of the more tax-friendly states to retire in. Among its tax-breaks is an exemption on Social Security benefits and the first $65,000 of most types of retirement income for couples and $42,000 for singles. It also allows seniors to claim the IRS’s Earned Income Tax Credit. The state also offers a low median property tax rate and no estate or inheritance tax.
Social Security
The government provides retirement benefits through Social Security, which is the primary source of income for most older Americans. It also helps lift millions of older adults above the poverty line, as shown by a recent Census Bureau study.
The system is largely funded through a dedicated payroll tax that current employers and employees pay. This tax is credited to trust funds that keep track of receipts and expenses for both the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) programs.
Without reforms, the trustees project that cash deficits will continue to build and eventually deplete the combined trust fund reserves. When that happens, Social Security beneficiaries will see an across-the-board benefit cut of 20 percent in 2035 on average.
In addition, if you begin receiving Social Security retirement benefits before your full retirement age, your benefits will be reduced. This reduction affects both yourself and your spouse, if you are married. You can calculate your full retirement age using the SSA’s Retirement Age Calculator.
