Retirement Budget Calculator: How to Determine How Much to Save
Your retirement savings budget may not fit in the experts' recommendations, so having your own retirement budget calculator is important.
Contributing Writer at Tally
February 18, 2022
Are you ready to start saving for your retirement? Before you do, you'll want to run a retirement budget calculator to figure out how much of your salary to save every month. While some experts say the retirement savings rule of thumb is 10% to 15% of your pretax income, this isn't a one-size-fits-all solution.
Instead of basing your retirement budget on what the average person needs, you can review all your retirement goals and various other factors to determine precisely how much you need to save to retire comfortably.
Below, we go over what variables to consider and the various retirement accounts you can use to reach your goals.
How much do you need in retirement savings?
Determining your retirement savings goal depends on a wide range of factors, including your:
Anticipated retirement expenses
Monthly income requirements
Goals in retirement
The age you plan to retire
Whether you plan to continue working part time in retirement
Other income sources
With a deep dive into these variables, though, you can determine how much of a nest egg you'll need to retire comfortably.
How many years do you have until retirement?
With your retirement goals figured out, you must then determine how long you have to meet this goal. Do so by determining your goal retirement age. Do you plan on retiring early? Great! You'll have more of your younger years to enjoy life. However, you'll also need more funds to maximize your younger years and still sustain your lifestyle in your later years.
Plan to retire a little late to capitalize on deferred Social Security benefits? That's OK, too, and will mean you can slow your savings pace a bit. However, you want to plan for potential medical issues pushing you into retirement earlier than expected and dealing with increased medical costs earlier in your retirement.
Either way, determine the age you wish to retire, then subtract your current age from that. This will give you the number of years you have to save until retirement.
How many years do you plan to stay retired?
The number of years of retirement you plan to have will also impact your retirement budget calculator. This means determining how long you think you will live. While it's impossible to precisely predict how long you'll live, you can look at the national average lifespan for your age group and combine that with health and family history to get a rough estimate.
Compare that number to your planned retirement budget to further determine how much you need to retire.
The type of retirement account to use
There is no shortage of available retirement accounts out there, and each one has benefits and drawbacks. Here are the main retirement savings options and how they impact your retirement budget calculator.
A 401(k) is a tax-advantaged retirement account some companies offer as a benefit of employment, and they include a handful of valuable benefits, making them one of the more important retirement accounts in any retirement budget calculator.
First, you fund a 401(k) retirement plan with pretax dollars, so your contributions reduce your taxable income today, lowering the taxes taken from your paycheck. Plus, their growth is tax-deferred, meaning the interest you earn is tax-free until you start making withdrawals — your retirement income. Your income will likely be lower by that point, so you may land in a lower tax bracket and pay less in taxes.
Second, many employers offer to match a certain contribution amount. For example, a common employer match is 100% of your contributions of up to 4% of your salary. So, if you earned $50,000 per year, the company would match dollar for dollar any 401(k) contributions you made up to $2,000. Essentially, you're getting an extra $2,000 per year just for saving for retirement.
Plus, the employer match grows like any other contribution you make to your 401(k) retirement savings account. The match is also untaxed until you begin making withdrawals in retirement.
There are a few downsides to a 401(k). First, you can't touch the cash for a predetermined period without paying hefty penalties. Generally, you can't make penalty-free 401(k) withdrawals until you're 59.5 years old. One exception is if you leave your job sponsoring the 401(k) when or after you turn 55 years old, you can start taking penalty-free disbursements.
The other downside is the contribution limit. The IRS allows you only to contribute up to $20,500 per year in 2022 — not including the employer match. But it revisits this limit yearly. Once you reach that cap, you must find another retirement account to contribute to.
Because of 401(k) accounts' tax benefits and employer matching, it's a good idea to contribute to this account first and continue increasing your contributions until you reach the IRS limit.
On average, 401(k) accounts deliver a 5% to 8% rate of return when the portfolio is 60% stocks and 40% bonds.
Roth Individual Retirement Account (IRA)
A Roth IRA is a retirement account an individual, not an employer, owns and contributes to. These contributions are not tax-deductible, so you make them with post-tax dollars. However, in most cases, you can withdraw your original contributions from a Roth IRA tax-free at any time. The only taxes and penalties you'd pay are on any growth beyond your original investment that you withdraw before reaching 59.5 years old or before the account has been opened for five years.
Roth IRAs also have other freedoms, such as making deposits beyond 70.5 years old and leaving your IRA balance untouched for as long as you live.
There are downsides to a Roth IRA, though, starting with the $6,000-per-year contribution limit — $7,000 for people over 50 years old. The IRS revisits this limit yearly and frequently increases it. You also pay taxes now, meaning you'll likely pay more in income tax than you would in retirement.
Roth IRAs generally deliver a 7% to 10% rate of return.
A traditional IRA follows all the same basic principles of a Roth IRA, but its most significant difference is that your contributions may be tax deductible, meaning you write off your contributions at tax time to lower your yearly tax burden. Tax deductions depend on your income and filing status.
A traditional IRA's main benefit is its tax deduction. However, this also means the IRS heavily regulates withdrawals and charges a 10% tax penalty on top of any income taxes on any traditional IRA withdrawals taken before age 59.5. Traditional IRA withdrawals in retirement are subject to income tax.
On average, a traditional IRA delivers a 10.8% rate of return.
A brokerage account is 100% owned by an individual and offers superior flexibility compared to IRAs and 401(k)s, as you're free to invest in virtually any stock, bond or mutual fund you'd like.
You fund these accounts with post-tax dollars, but the benefit is you can sell off your investments whenever you'd like and use the cash you receive. This is great for folks planning to retire before reaching 55 or 59.5 years old.
There is one big downside to a brokerage account, and that's the fact you can lose 100% of your investment in the stock market. It's always a good idea to consult a financial planning expert or a financial professional with investment expertise to guide you through the right investments and diversity to avoid this potential issue.
Another downside is these accounts don't grow tax-free, so you must account for any growth in your yearly taxes and pay income tax on it.
The average rate of return on the stock market is 10% per year, but expect to adjust this 2% to 3% for inflation rates.
Health Savings Account (HSA)
The HSA is a dark horse in retirement planning, as most people associate it only with high-deductible health insurance plans. Sure, this is a tax-free way for you to set aside cash for medical issues, but it also allows for even more tax-deferred investment.
Many HSAs offer the ability to invest a certain amount of your contributions just like a 401(k) or IRA. You can deposit up to $3,650 as an individual or $7,300 as a family into an HSA. You can choose to invest the full amount or leave a small balance in the normal HSA and invest the rest. Either way, the invested cash is easily accessible when needed.
And if you remain relatively healthy and manage to save the majority of your HSA contributions throughout your working life, you can start making non-penalized withdrawals from your HSA for any reason starting at age 65. This essentially makes it the same as an IRA or 401(k).
The only real downside to an HSA is until you reach 65, you can only use the funds for approved medical purchases. Any unapproved purchase will result in a 20% penalty and income tax on the amount you used.
Because HSA investments are in stocks and mutual funds, they will follow roughly the same 10% rate of return as the stock market. There is also no pressure to invest your HSA funds. You can simply use it as a tax-advantaged savings account if you’d like.
Your retirement budget calculator has many variables
No two retirement calculators are the same, as everyone has different retirement goals. Some want to retire early and enjoy their younger years, whereas others work well into their 60s to build a larger nest egg. This is why you must look at these variables for yourself to develop your own retirement budget calculator to see just how much you must save each month to enjoy your ideal retirement.
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