SAVING for retirement can be straightforward if you use simple rules, like the 4% rule.
Money expert and TikToker Cavan Stackpool shared with his 29,000 followers a simple formula for planning your retirement in a recent video.
Cavan Stackpool is a money expert offering personal finance tips
Cavan shares that in order to start saving, you must answer these two questions:
- How much money do you want every year in retirement?
- What age do you want to retire?
For example, let’s say a person’s income is $36,000.
We’ll then estimate that they have 30 years until they retire with an annual inflation rate of 2%.
Cavan says that next, you must adjust for inflation the annual income that you are looking to have.
This is where the rule of four comes in.
The 4% rule
Cavan explains: “The 4% rule states that you can withdraw 4% of your retirement savings each and every year and have a really good chance of never running out of money in your retirement.”
You take that income of about $65,000 and divide it by 4%.
This tells you how much money you need to save to be able to retire.
For this example, this person would need to save $1.6million.
Just note that this does not account for Social Security or pensions.
Other ways to plan for retirement
Contribute to your 401(k) plan.
A 401(k) plan is a retirement saving and investing plan that many companies offer their employees.
The plan awards employees with tax breaks on any money they contribute.
There are a few different plans though, so it’s important to check with the IRS website and your employer to see which one works best for you.
Some companies will even offer up to 5% of each paycheck.
Contributions are automatically withdrawn from your paycheck and then invested in funds of your choosing.
Many experts suggest investing around 15% of your gross income.
Another way to properly plan is by maximizing Social Security benefits.
Social Security is based on your highest 35 years of earnings and differs depending on those years and when you choose to start receiving benefits.
Typically, the benefits are meant to replace about 40% of your pre-retirement income.
Many decide to take their Social Security benefits at 62 but choosing to withdrawal early significantly reduces your amount.
Others choose to wait until their full retirement age, 70, as their benefit amount increases substantially.