How Much Do I Need to Retire? Retirement Planning 101

Hi! I'm Kirsten from The Motley FoolIn this FAQ, we're going to answer a question everyone wants to know -- how much money doI need to retire? First of all, it's great that you're asking yourself this questionHaving enough for retirement doesn't just happen It's a coordinated effort

That effort is easier if you have a goal in mind So, how much money do you need to retire?The real answer is that it's different for everyone, but let's start with the generalrule and break down how that can varyMost studies agree that in order to retire, you will need about 12X your annual salaryat retirement age If that sounds like a lot, that's because it is

That's why it's so important to save -- or, as I like to think of it, paying your future selfIf that number sounds intimidating, let's look at all the ways you can build up to thatFirst of all, that total amount you need for retirement does include Social SecurityMost people have been paying into Social Security a little bit with each paycheck every year that they work

If that's you, you can expect to receive a monthly benefit check in retirementTo maximize your monthly check, there's a couple of things you can doOne, make as high a salary as you possibly can You were probably already doing that one

Two, work a full 35 years, because that's how many years the Social Security Administrationis basing your benefits onAnd, as a bonus, if you're making a higher salary toward the end of your career, whichis quite common, you can work more than 35 years to increase your monthly Social Security benefit checkThree, delay retirementWe here at The Motley Fool like to say that 70 is the new 65 when it comes to retirement age

For more details on calculating your expected monthly Social Security benefits and how tooptimize that check, check out the link in the description belowBut even then, Social Security will not cover all that you need in retirementIn its benefit overview document, the Social Security Administration makes it clear --Social Security was never meant to be the only source of income for people when they retireIt is designed to replace a percentage of your income, depending on how much you earn

For very low earners, Social Security can provide up to 75% of your retirement needsFor medium earners, about 40% For high earners, about 27%The rest of your retirement funds will come from whatever you have saved, so it's importantto make sure you are saving

The best place to start, if it's available to you, is an employee

savings planMost commonly, this is a 401(k) If your employer offers one, make sure you're using itThis is a tax-advantaged account for saving, meaning you don't have to pay any taxes nowon the money you contribute to this account

Plus, according to the Bureau of Labor Statistics, roughly half of companies offer a 401(k) match,up to an average of 3%That means, as an example, that if you contributed 3% of your paycheck to this account, youremployer will match it with another 3% That's free moneyMake sure to save at least enough to get the full employer's match

Ideally, a solid personal savings goal is 15% of your paycheck, including any company matchIf your company will match up to 5%, you should personally sock away 10% of your paycheckinto your workplace retirement account, for a total of 15% savedBy the way, if you don't have a workplace plan, you can still save in an individualretirement account, an IRA; or, if you're self-employed, you can use a solo 401(k)The beauty of all these retirement accounts is that your money grows in two ways

First, it will grow as you steadily contribute to it each monthBut second, all the money in your account will be invested and will grow all on itsown through the magic of compounding interestFor a quick example, investing $3,000 per year for 40 years at an annual rate of 8%yields over $750,000 come retirement timeThat may be enough for people with a relatively low cost of living, but it might not be closeto enough for folks that head into retirement with a lot of expenses

That's why it's also important to think about the money you have going out when you're makingyour retirement plansMaybe you had children who had since moved out of your homeConsider downsizingIf you live in an expensive area, consider moving somewhere with a lower cost of living

Maybe even move to a state with no state income taxThat means fewer taxes on Social Security benefits, 401(k) withdrawals, and other retirement incomeThere's a reason Florida is such a popular retirement destinationThere isn't a one-size-fits-all answer to how much money you need to comfortably retire,but understanding the 12X income rule, realizing that Social Security is just a part of theretirement picture, and adjusting expenses will put you on the path to finding the right figure for yourself

Thanks for watching, everyone!If you have any thoughts on the topic or have any future topics you'd like to request, drop a comment belowIf you want more help getting started, check out our investing starter kit It's freeYou can find it over at fool

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