It's a question that hangs over many of us when we think about retirement:
Will I have enough money to do the things I want to do?
Retirement used to be simpler. Large employers often provided pension plans, and many people simply counted on those and Social Security to see them through their golden years.
Today, pensions have been largely replaced by 401(k) retirement plans that require employee contributions, and the weight of saving for retirement falls on the individual.
And although the means to the end may have changed, the question remains essentially the same:
How do I know how much I'll need?
Not surprisingly, many of the financial experts we've talked to say the answer depends in part on the lifestyle you envision in retirement. You no longer will have work-related expenses and may be able to economize in other areas. But with free time on your hands, you might be looking forward to more travel or taking up new activities. Health-related expenses also usually increase as you age.
This means there is no fixed number, but a range. "In the roughest of terms, you will need anywhere from 70 percent to more than 100 percent of your annual working-life income to live in retirement as well as you do today," Jeff Opdyke writes in The Wall Street Journal Complete Personal Finance Guidebook.
Frank Armstrong III, and Paul Brown, authors of Save Your Retirement, provide a rule of thumb for how large your savings will have to be to provide different levels of income: "For every $1 of annual income you need to generate from your savings, you should have at least $25 in your capital account," they write. "That's what it takes to have a sustainable withdrawal rate of 4 percent from a diversified portfolio that should last at least 30 years."
For $40,000 in annual retirement income, in other words, you need $1 million in your retirement portfolio.
Another point to remember: Social Security should provide you some income. Plus, if you start putting money aside sooner rather than later, you make the job much easier. "Time is an investor's most valuable ally," Brown and Armstrong note. "Returns tend to increase exponentially over time, which is as close to magic as most of us will ever see."
If you do some quick calculating and find there's a gap. Putting money into a diversified set of IRA options — including a Roth IRA, which can provide tax-free retirement income — can be another part of securing your nest egg. An Ally Bank Roth or traditional IRA also offers the peace of mind that comes from your deposits being insured from the Federal Deposit Insurance Corp. (FDIC) to the maximum allowed by law. Plus, our great rates mean you'll be earning an annual percentage yield (APY) that's among the most competitive in the country according to rates published by Bankrate.
Learn more at Allybank.com, or by calling live customer care at 877-247-ALLY (2559), where help is available 24/7.