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Retirement. It could be decades ahead of you or just a few years away.

No matter how close or far away it is, you probably have thought about how much money you will need. Are you saving enough? Are you spending too much? How much money will you need to enjoy retirement?

A Simple Retirement Calculation

Retirement calculations can be complex or simple, depending on your interest in the topic and the time you have to spend get a meaningful number. But there’s one calculation that still stands the test of time:

You’ll need between 70–80% of what you earn today to maintain the same lifestyle in retirement.

There are other factors to consider in retirement, including:

Do you expect your expenses to be higher or lower when you retire?

Many people assume that their living expenses in Rhode Island will go down in retirement as mortgage and car loans get paid off. But even if that’s the case and those expenses are gone, you may want to travel more in retirement than you do today. Or maybe you’ve been counting on a second home at the lake.

Do you know what sources of income you’ll have in retirement?

Do you plan to work part-time? Are you counting on money from another outside source? And what do you expect to receive from Social Security? These are important questions to ask — and answer.

How much money will you need to draw each year from the money you saved for retirement?

Financial professionals often refer to this as “4% rule,” where you may be able to withdraw 4% of the money saved for retirement without running out of money. But, as they say, your mileage may vary.

Retirement Savings Calculation Example

If you decide you want to fund your retirement at 70% of your pre-retirement income today and your annual salary living in Rhode Island, for example, is $80,000, you will need $56,000 each year to maintain your same standard of living.

If your annual Social Security benefits are $17,713 (that’s the average for 2020), this means you’ll need about $38,287 each year to cover the deficit. Assuming a conservative 4% percent rate of return over time, you could need about $975,000 in your retirement savings or approximately $39,000 in additional monies — and perhaps even more as time goes on — to keep pace with cost-of-living increases tied to inflation rates.

This example is just one scenario, and it likely doesn’t represent your annual salary or your benefit payment that’s projected on your annual Social Security statement.

Save Up to (and Even Through) Retirement

The bottom line is this: If you don’t want to make major changes to your Rhode Island lifestyle in retirement, you should be saving a chunk of money each year until you hit retirement — and quite possibly continue to save throughout retirement — to fund everything you need to live comfortably.

Despite predictions that our nation’s subsidy won’t last, Social Security benefits continue to be the main source of income for many retirees. Depending on the amount you paid into it (through your payroll taxes and your employers’ payments), your monthly benefit check might not cover all your wants and needs. Just how big or how small your government benefit is, depends on your salary history over your lifetime.

Great if You Have One: Pension Plans

Are you counting on a pension plan in addition to an employer-sponsored retirement plan? If so, consider yourself one of the lucky ones, as more and more Rhode Island companies have phased out this retirement benefit.

Pension plans (also called a defined benefit or DB plan) are designed to provide you with a recurring benefit based on how you and your employer contributed to it.

If you have a DB plan, it can help to supplement the amount of money you will need in retirement.

More Common Today: 401(k) Plans

The more available and accessible way to save for retirement is through an employer’s savings plan — a 401(k) or 403(b) plan if you work in education, for a nonprofit or other tax-exempt organization.

Defined contribution (DC) plans, such as these, offer tax-deferred growth and don’t require you to withdraw money until the year after you reach the age of 70 ½. (Note the new SECURE Act announcement from the IRS regarding a recent change to required minimum distributions.)

401(k)s and 403(b)s give you an opportunity to make saving for retirement a recurring habit through regular payroll deductions. When you put away money for the future in a DC plan, your retirement monies can be a significant addition to what you’re expecting from Social Security or a DB plan.

Defined Contribution Plan Limits

Each year, annual contributions to DC plans are capped at a certain amount. For example, in 2020 the IRS set the maximum annual contribution to $19,500, with an additional $6,500 contribution if you’re age 50 or older.

Your employer likely offers a matching contribution up to a specified amount or percentage, which gives you the opportunity to grow your retirement savings account even more.

IRAs and Roth IRAs

Another way to save for retirement is by opening an Individual Retirement Account (IRA) or Roth IRA.

Depending on your income and eligibility to participate in an employer’s retirement savings plan, your IRA contributions may also be tax-deductible.

Contributions to Roth IRAs are not tax-deductible; however, you may be able to take advantage of less restrictive guidelines on withdrawals from Roth IRAs.

To learn more about your eligibility to contribute to a Roth IRA, view the IRS’ guidelines for 2020.

Retirement Help at the Right Time

Saving for retirement — and saving enough to meet your projected future needs living in Rhode Island — is likely to be one of the most important financial decisions you’ll make in your lifetime.

No matter where you are in your savings journey, we can help you answer the question Will I have enough money for retirement.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. You should discuss your specific situation with the appropriate professional.