Investing For Retirement – How Much Will I Need to Replace My Pre-Retirement Income in Retirement?

The answer depends on a variety of factors, including your unique retirement vision and the size of your savings. But a common rule of thumb is that you can replace about 85% of your pre-retirement income in retirement using your investments, Social Security benefits, pensions and other sources of income.

That estimate is based on the average of three widely accepted figures. It assumes that you’ll need 6% of your investment account balance to cover basic expenses in retirement, that you’ll save 15% and that your investment returns will be about 6% annually. While these figures aren’t exact, they are useful benchmarks to help you understand what you need to achieve your goals and how much it may cost.

The amount you need to retire also depends on the age you want to retire and other sources of retirement income. For most people, Social Security will be an important part of their overall savings. They may also have additional retirement income from the sale of a business or home, pensions, rental income or inheritance.

For people in their 40s and 50s, the savings goal should remain the same — to build up an appropriate asset mix. But you’ll likely need to make changes in your investment strategy as you approach retirement.

In general, stocks are more risky than bonds, so reducing your exposure to them as you near retirement can help reduce your risks. It’s also important to have a sufficient level of liquidity at that point, as your withdrawals will likely be greater than during your saving years. That’s why having cash and short-term bonds or bond ladders in your portfolio can be helpful.

Your asset allocation should also depend on your tolerance for market fluctuations. If you can weather a decline, then you may be able to take on more investment risk and potentially get the growth you need to meet your retirement goals.

If you can’t handle volatility, you may want to add more income guarantees to your portfolio. This includes annuities, which can provide steady, inflation-adjusted income during retirement and a way to supplement other retirement income. But be aware that annuities can carry certain risks, including the risk of losing a significant portion of your principal. And if you withdraw funds from an annuity before age 59 1/2, you could face a 10% penalty.

Once you’re in retirement, the key is to maintain your strategic asset mix and stick with it. You’ll still need the growth potential of stocks, but you might also benefit from adding some bonds to your portfolio (Treasurys, high-grade corporate bonds and annuities). They can offer stability and lower risk than stock markets. And with longer life spans, it’s becoming more important to include a substantial allocation of fixed-income assets in your portfolio.