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Retirement investments turn into Retirement Salary, determining Retirement Lifestyle

How Much Will I Need to Invest?

Before covering in detail how much you'll need to save and how your retirement funds should be invested, let's determine how much money you'll need in retirement.  As mentioned on the Establishing a Retirement Budget and Retirement Timing pages of this website, there are various rules of thumb regarding what percent of your pre-retirement income you’ll need, and these vary widely (50%-90%) based on your pre-retirement lifestyle and retirement goals/plans (see Setting Retirement Goals).  Let's assume that after counting social security payments, you'll need to generate 50% of your pre-retirement income through other means.  Let's also assume that that your investments will grow 6% annually and that you'll also earn 6% on your post-retirement investments.  (Note that I prefer the 6% figure since it supports a rule of thumb that a $100,000 investment will yield $500 per month of income).  With these assumptions, the table at the right of this page shows how much of your pre-retirement income you'll need to invest each month to have 50% of it available in retirement. 

Where Should I Invest?

With many investment options such as those presented here, it can be difficult to determine where to stash your extra cash, assuring its availability (with growth) when needed. The answer depends on how much you have to invest, your risk tolerance, and whether you are still working or retired. Following is my personal advice based on experience, both prior to and after retirement:

  1. Pre-Retirement (still working) -- Invest in 401k's, especially if your employer provides an investment match. If you have extra funds, open an IRA account at a bank or brokerage firm and make regular deposits to it. Finally, consider regular bond purchases, particularly I-bonds, which provide inflation protection.
  1. Post-Retirement -- Transfer, in most situations, your 401k money into an IRA account. Once you are 70 1/2 years old and need to take RMDs (Required Minimum Distributions), invest any extra cash into a brokerage account that is either professionally or self-managed (based on your expertise and confidence). Consider purchasing dividend stocks for extra income and inflation protection.

Retirement Investing Overview

As previously mentioned, retirement savings can be made in pre-tax dollars into tax-qualified accounts [401(k)’s, traditional IRA’s, etc.] or after-tax dollars into Roth IRAs, regular brokerage accounts, savings accounts, etc.  It's generally a good idea to have much or most of your retirement investments in tax qualified accounts.  Money added to these accounts is not taxed until it is withdrawn, generally much later in retirement.  Any growth in these accounts, through interest, dividends or asset appreciation also grows tax-free.

There are however many good reasons why a portion of your investments should be in after-tax dollars.  Many of these investments can be converted to cash (income) at any time and any age without penalties.  When money is taken out of these accounts, only the investment growth is taxed not the money put into the account.  This may be especially important in retirement, when any additional taxed income could put you into a higher tax bracket.

The following tax-qualified and non-qualified accounts are most typically used for retirement savings/investments: 401(k)’s, IRA’s, Annuities, Brokerage Accounts, Certificates of Deposit (CD’s), and US Savings Bonds. Information on each of these investment alternatives is provided through the "Retirement Investing Links" on this page.

Monthly Retirement Savings Requirements for 50% of Salary:

Years to
--- Current Annual Salary / Total $ Needed ---
$75,000 /
$100,000 /
$125,000 /
$150,000 /
$200,000 /
5 Years$8,958 $11,944 $14,930 $17,916 $23,888
10 Years$3,814 $5,085 $6,356 $7,628 $10,170
15 Years$2,149 $2,865 $3,582 $4,298 $5,731
20 Years$1,353 $1,804 $2,254 $2,705 $3,607
25 Years$902$1,203 $1,503 $1,804 $2,405
30 Years$622$830$1,037 $1,244 $1,659
35 Years$439$585$731$877$1,170
40 Years$314$418$523$628$837