Everyone dreams of retirement one day. Whether you’re planning to sit on the beach with fruit drinks or quietly retreat in your home, there aren’t many people who don’t want to make time for themselves after a long career.
However, just because you are retired does not mean that you no longer need to worry about money. You will need retirement income to pay for living expenses. Depending on how you plan to retire, you may need more income than other people.
So what is good retirement income and how do you make sure you can cover your expenses? Here’s what you need to know.
What is the average income of retirees?
Each year, the Census Bureau publishes a report called Income and Poverty in the United States. Assuming that homeowners 65 and older are mostly retirees, the median income of a retiree in 2020 was about $ 46,360.
Determining the average income can be helpful, but keep in mind that averages are just averages. Many factors can affect a retiree’s income.
For example, people living in an area with a higher cost of living were likely to receive higher incomes, which could lead to higher savings, larger pensions, and more substantial social security benefits.
In addition, the average income may or may not be sufficient depending on your personal retirement goals. Traveling and eating out can be expensive, and some retirees spend money on large purchases, such as boats and mobile homes, which can be expensive to maintain. Even reducing the size of an apartment to an apartment can cut your income (these HOA fees are expensive).
How much do retirees spend per year?
Another metric to think about is how much the average retiree spends each year. As long as your retirement income covers your expenses, you’re doing well. If you can earn more than you spend in retirement, you will be prepared for economic downturns, or you can increase the amount of eggs you lay for your offspring.
The average retiree at age 65 can live another 19.4 years and spend $ 987,000 starting at retirement age, averaging $ 50,876.29 per year – that’s $ 4,500 more than the average retiree’s annual income!
Like retirement income, the amount retirees spend will vary greatly. Retirees who own their homes do not have to pay rent or mortgages. Those who live in high-cost areas, such as coastal cities, can expect to spend more than those who live in low-cost areas.
Unsurprisingly, retirees tend to spend much more on health care than younger people. The average family of retirees spends nearly $ 7,000 a year on healthcare, compared to about $ 5,000 a year for non-retirees, a difference of almost $ 2,000 a year.
Even your hobbies can affect your retirement spending. Anyone who wants to play golf every day is likely to spend more than a senior citizen who likes to go to the park to read and watch.
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Where does retirement income come from?
Pensioners can receive a portion of their retirement income from social security, pensions and savings.
It’s time to maximize your retirement income.
There is a Social Security penalty before your full pension and a Social Security delay bonus. This means that waiting for Social Security can increase your income.
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If you have a pension, make sure you fully understand it and how it works. Most of them determine your benefits based on your experience with the company, your retirement age, and your average income over the past few years. Trying to earn as much as possible and making sure you meet the maximum payout requirements will help you maximize your retirement income.
Most people put their retirement savings into 401 (k) s and IRAs, which offer tax breaks for retirement savings. There are limits on your annual contribution, so you should visit the IRS website for the most up-to-date information on contribution limits.
Increasing these accounts as much as possible, or at least making enough contribution to take advantage of your employer’s matching contributions, can help you maximize your contribution.
In short, to get the highest retirement income possible:
- Earn as much as possible in your career
- Delay Social Security payments as much as you can
- Contribute as much as possible to retirement accounts
- If you have a pension, stick with your employer and maximize your income before retirement.
How can you predict your retirement income?
Create a mySocialSecurity account. This is a website operated by the US government and provides an estimated monthly benefit. It also allows you to check your career earnings to make sure the number is correct.
Again, if your employer has a pension, you should review your pension records to determine the amount of your benefit. Keep in mind that some retirement plans reduce your benefit based on your Social Security income, which can make your calculations a little difficult.
Finally, determine how much you will extract from your savings each year.
If you have cash in an interest bearing account, base the withdrawal on how much money you have, the interest paid on the account, and how long you expect you to need income.
For example, if you have $ 500,000 in an investment account with a 6% annual return, you can withdraw $ 3,000 per month for 22 years. The more you accumulate, the more you can withdraw. Mutual of Omaha has a handy calculator with which you can calculate how long your savings will last.
If you’ve built a solid investment portfolio, you may be able to live off interest. One rule of thumb you can use is the 4% rule, which states that you can safely withdraw 4% of your initial savings each year without worrying about running out.
The 4% rule came from the Trinity Study, in which researchers found that 4% is a safe withdrawal rate for an investment portfolio with an even split between stocks and bonds. For 30 years, an investor runs out of savings only in 5% of cases.
So, if you have accumulated $ 1 million, you can assume that your nest egg will provide you with a regular income of $ 40,000 a year or $ 3,333 a month after retirement.
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Bottom line: what is good retirement income?
There are many ways to determine good retirement income. You can aim for above average income ($ 46,360) or income sufficient to support your lifestyle. Whatever you decide, your goal is up to you.
If you have an idea of your retirement spending and can predict your retirement income and how much you need to save to achieve your income target, you will be on your way to a good retirement.