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The amount of money an average person should have in their retirement savings by the time they are 65 years old depends on various factors, including their desired lifestyle in retirement, their current expenses, and the expected duration of their retirement. There is no one-size-fits-all answer, as people's financial situations and retirement goals can vary significantly.
Financial advisors often recommend that individuals aim to replace at least 70-80% of their pre-retirement income to maintain a comfortable lifestyle in retirement. To determine how much you should have saved, you can follow these general steps:
1) Estimate your retirement expenses: Calculate your expected annual expenses in retirement, including housing, healthcare, transportation, food, and leisure activities. Don't forget to consider inflation when projecting future expenses.
2) Social Security and other income sources: Determine how much you can expect from Social Security, pensions, and other sources of retirement income.
3) Calculate the savings needed: Subtract your expected retirement income from your estimated expenses to determine the annual gap that needs to be covered by your retirement savings.
4) Use the 4% rule: A common guideline is to withdraw around 4% of your retirement savings each year during retirement. This rule provides a balance between maintaining your savings and covering your expenses. So, multiply your annual gap (from step 3) by 25 to estimate how much you should have saved.
For example, if your annual expenses in retirement are $40,000, and your expected retirement income (Social Security, pensions, etc.) is $25,000, you'll have a $15,000 annual gap to cover with your retirement savings. Using the 4% rule, you should have approximately $375,000 saved by the time you retire (15,000 x 25).
However, this is a simplified estimate, and individual circumstances can vary greatly. It's essential to consult with a financial advisor to create a personalized retirement plan based on your specific financial situation, goals, and risk tolerance. They can provide more accurate guidance based on your unique circumstances and help you make any necessary adjustments to ensure a comfortable retirement.