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Amount of Income and Savings Needed for Retirement
This table shows the amount of savings you might need by the time you retire, based on your desired annual income during retirement. It also shows how much you could plan to save each month until retirement to reach your goal, based on the number of years until your retirement. The table assumes that the cost of living rises at a 4% annual rate, retirement lasts 25 years, and your savings earn a 6% rate annually.
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Average Annual Living Expenses for Different Age Groups
Annual expenses in retirement may vary widely from person to person. But the average expense levels recorded in federal surveys suggest that spending generally declines as people get older.
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How Much Will You Need to Save and How Long Will It Last?
When contemplating your retirement income strategy, you may want to consider how much you could potentially withdraw from your nest egg each year without risking running out of money. This table is designed to give you a rough idea. It suggests annual withdrawal amounts keyed to the size of your nest egg and the expected duration of your planned retirement. The calculations assume that you would increase your withdrawal by 3% each year to account for inflation and that assets remaining in the account would earn 5% per year.
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Required Minimum Distributions (RMDs)
The tax law mandates that you begin withdrawing assets from a traditional IRA or 401(k) plan by a certain age, usually by April 1 of the year following the year you turn 73. (This age was changed from 72, effective January 1, 2023.) This chart shows select figures from the most broadly applicable required minimum distribution (RMD) table--the Uniform Lifetime Table--and indicates the approximate percentage that must be withdrawn. For example, a typical 75-year-old person must withdraw a minimum of about 4.1% of the total balance of such accounts or else pay a significant penalty tax on any shortfall. The RMD rules are complex. You can learn more details in IRS Publication 590-B or by consulting a tax professional.
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Retirement Savings at Various Withdrawal Rates
This chart shows how long your retirement savings might last at various withdrawal rates. The chart assumes $500,000 in savings at retirement, a 3% annual inflation rate, and a 6% annual rate of return.
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Sources of Income for People Aged 65 and Older
This chart shows the proportions of income for older Americans as a whole that were attributable to the indicated sources. "Earnings" includes wages, salaries, and other employment-based compensation. "Pensions" includes distributions from qualified retirement savings plans. "Asset Income" is generally that from investments held in taxable accounts.
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Tax-Efficient Withdrawal
This example shows how waiting to withdraw tax-deferred assets after taxable assets can help make your retirement nest egg last longer. It assumes a $700,000 original account balance equally distributed in taxable and tax-deferred accounts. It also assumes a $32,000 withdrawal in the first year, that subsequent annual withdrawals will increase to keep pace with a 3% rate of inflation, that investments earn 6% annually, and that withdrawals are taxable at the 22% federal income tax rate.
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The Advantage of Tax Deferral
When taxes are deferred on an investment account and earnings are reinvested, the value of the assets in the account may grow faster than similar assets held in a taxable account. As this chart illustrates, the difference may be significant over time. Keep in mind, however, that you could still owe taxes on amounts withdrawn from the account. Also keep in mind that these taxes may be greater than the taxes that could have been paid on earnings in a non-deferred account.
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Roth and Traditional IRA Basics
There are two types of IRAs: the traditional IRA and the Roth IRA. This table compares the rules and potential benefits of each.
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Inflation's Impact on Retirement Income Needs
This chart illustrates how inflation could impact your income needs in retirement. For example, if you were to start retirement with an annual income of $40,000, it could have to grow to over $62,000 in 15 years and over $97,000 in 30 years if it were to keep up with a 3% annual rate of inflation. If the annual inflation were 5%, you could need over $83,000 after 15 years and over $172,000 after 30 years just to keep up with it.
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Maximum Sustainable Withdrawal Rates
How much could you afford to withdraw from your retirement savings? This chart may help you decide. It shows the maximum potential withdrawal rate for each 30-year period from 1926 through 2024 that would have allowed a nest egg to last for a full 30-year period. Generally, periods with strong investment returns and low inflation would have allowed your savings to last longer. While the average of all 30-year periods was about 6.6%, sustainable withdrawal rates could have been as high as 11.4% (1982-2011) and as low as 3.8% (1966-1995).
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The Effects of Starting Early and Compounding on Investments Over Time
Investor A contributed $20,000 over 10 years, then let compounding work for 20 more years. By December 31, 2024, the account grew to $204,127.
Investor B contributed $80,000 over 20 years double the contributions but ended with only $170,432.
Result: Starting early gave Investor A a $33,695 advantage, despite contributing much less.
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Contributing Early Helps Investment Results
Investing a smaller dollar amount over a longer time horizon could have a greater impact on the eventual investment result than investing a larger amount over a shorter period. Consider the values that could be achieved at age 65 by a 25-year-old who invested $75 a month and a 35-year-old who invested $100 a month, both earning the same rates of return. By starting to save earlier, the 25-year-old could have been able to accumulate more savings at age 65 despite investing less each period.
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A 1% Difference in Contribution Rates Can Make a Big Difference
This chart shows how a 1% difference in the rate of contributions could affect savings results over time. Consider the cases of two individuals, each earning $35,000 per year. Investor A contributes 4% of monthly earnings at the start of each month for 30 years; Investor B, 5% under the same terms. Both earn the same return, 6% per year compounded monthly. At the end of 30 years, Investor B could have $29,445 more than Investor A, even though Investor B's added contribution was only $10,500.
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Retirement Savings: A Little Extra Could Make a Big Difference
How much you contribute to your retirement savings plan today can make a big difference in how much you have when you're ready to retire. Just upping your contribution from 4% to 6% could add close to $59,000 to your nest egg over 30 years, assuming a $35,000 salary, a 6% annual rate of return, monthly contributions, and tax deferral on contributions and earnings until retirement.
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