When planning for retirement, there are various variables to consider to determine how much you need to retire. For example, how long you will live and your estimated expenses in retirement can help you know the amount you will need to retire comfortably.
A good retirement income is about 80% of your pre-retirement income before leaving the workforce. For example, if your pre-retirement income is $5,000 you should aim to have a $4,000 retirement income. Typically, the amount you need to retire comfortably can vary based on your desired retirement lifestyle, healthcare costs, cost of living, and the expected life expectancy.
What is a good monthly retirement income?
A good retirement income should be sufficient to maintain your retirement lifestyle to what it was before you retired. A good rule of thumb is to replace about 80% of your pre-retirement income. When deciding how much you will need when you retire, you should consider your personal finance goals, retirement expenses, and future travel plans.
For example, if your pre-retirement income was $5,000, you should aim to have an average monthly retirement income of $4,000, which is equivalent to 80% of your income before retirement. The reason you do not need to replace 100% of your pre-retirement income is that you will be able to eliminate certain expenses like retirement contributions and commuting expenses.
When you retire, certain expenses may increase while other expenses may decrease or be non-existence. Expenses that may increase include healthcare expenses, which can take a bigger chunk of your retirement income if you have a long-term illness. However, other expenses like student loan payments and mortgage payments may be low or non-existent if you had already paid these loans before you retired.
Where does retirement income come from?
Most retirees have various sources of retirement income, ranging from investment accounts, payouts from government programs, to distributions from retirement accounts.
Here are the main sources of retirement income:
Social security benefits
Social security is the biggest source of retirement income for most retirees. Once you retire, social security pays you an income based on your pre-retirement earnings. In 2022, the highest social security income is $4,194 a month for workers retiring at full retirement age.
If you want to maximize your social security benefits, you should delay taking these benefits until when you reach the full retirement age. If you start receiving these benefits before you have reached the full retirement age, you will receive reduced payouts.
Pensions
If your employer has a pension plan, you should expect to receive pension payments when you retire. While most employers have replaced pension plans with 401(k) plans, there is still a handful of employers who run pension plans. The main types of pensions include military pensions, federal government pensions, state/local government pensions, and private pensions. The median pension benefit ranges from $10,788 for private pensions to $22,687 for federal government pensions.
Personal financial assets
Personal financial assets may include investments and retirement accounts like real estate, stocks, 401(k), IRA accounts, and annuities.
If your employer provides a 401(k) plan, you can start taking penalty-free distributions from your 401(k) once you reach age 59. If you have a Roth 401(k), you can take tax and penalty-free distributions once you reach age 59.
You can also receive passive income from real estate and dividend-earning stocks when you retire.
Employment income
There are plenty of retiree-friendly employment opportunities. If you want to supplement your retirement income, you can find a job or start a business to earn an income. You can also take up a part-time job so that you have time to explore the outdoors.
How to Boost Your Retirement Income
If you are a few years away from retirement, here are strategies you can use to boost your retirement income:
Max out your retirement contributions
If you have access to a 401(k), IRA, Roth IRA, or other retirement accounts, you should contribute as much as you can up to the annual contribution limit. If you have a 401(k), you can contribute up to $20,500 in 2022, or $27,000 if you are above 50. If you have an IRA, you can contribute up to $6,000 in 2022, or $7,000 if you are above 50.
Delay taking social security
While you may be eligible to start receiving social security benefits as early as age 62, you should wait until you reach the full retirement age to get maximum benefits. If you wait until age 70 to take social security benefits, you will receive a bigger payout. Typically, the longer you wait to receive social security, the larger the payouts will be.
Get help from financial assistance programs
There are various forms of government assistance available to low-income retirees. If you are a veteran, you may be eligible to receive financial assistance from the Veteran Administration benefits. Check with your state government to see if you are eligible for financial assistance programs.
