Retirement planning requires periodic checkups just to ensure you're on track toward meeting your financial goals. By the time you reach age 40, you should have a significant portion of your retirement savings accumulated. If you're starting out late in life, you'll need to know how much you need to save so that you can retire when you want to.
The purpose of your retirement savings is to support you when you're older. This money needs to pay for your expenses in retirement. These expenses may include more than income. You may need money for large purchases like home repairs or to fix your automobile.
According to Leslie Geary, contributor for Bankrate.com, 35 percent of people between 45 to 54 have less than $25,000 saved up. If you want $1 million in personal savings by age 67, which can provide $50,000 in retirement indefinitely, assuming a 5 percent rate of return in retirement, you need to save $10,000 per year and earn 9 percent annually. By having saved money before age 40, you need much less than this. However, it all depends on your financial goals and what you want for your own retirement.
Don't forget about social security and any pensions you might receive. These sources of income replace some of your need for personal savings. At age 40, you may need far less than you think since social security will pay for a portion of your income, and your employer's pension will provide another source of income to you. These income sources are paid out to you until your death.
While a personal savings of $1 million is necessary to earn $50,000 per year annually if you're drawing just 5 percent interest, you can get away with much less in total savings. This is because you can use insurance policies, called annuities, to reduce the total savings you require. Annuities convert your entire savings to monthly payments. This conversion returns all of your retirement savings to you that you've accumulated plus additional interest on each payment. Since the principal is being returned, a lower total savings amount is required. Annuities guarantee your income for life, so you'll never run out of money.