Retirement Savings Calculator (401k / IRA)
Retirement Planning Guide – Capital One (capitlon.com)
What is Retirement?
Retirement is the stage of life when a person permanently leaves the workforce and begins living off savings, pensions, and other income sources. For most, retirement occurs between the ages of 55 and 70 and lasts for the remainder of their lives.
Some choose full retirement, while others may semi-retire, gradually reducing their work hours. In some cases, people return to work after retiring, depending on health, financial needs, or personal preference.
Why Do People Retire?
The decision to retire is influenced by multiple factors:
- Health: Physical or mental health limitations may make it difficult to continue working.
- Age: Many people retire once they reach a traditional retirement age.
- Workplace Stress: High stress or job dissatisfaction can accelerate retirement decisions.
- Financial Readiness: The most important factor—whether an individual has enough savings or income to sustain their lifestyle.
While some rely solely on Social Security, it generally replaces only about 40% of pre-retirement income, making personal savings and investments essential.
How Much to Save for Retirement
There is no single answer, but general guidelines can help:
10%–15% Rule
Saving 10–15% of annual pre-tax income throughout a working career can build a substantial retirement fund. For example, earning $50,000 a year and saving 10% would add $5,000 annually toward retirement.
80% Rule
Plan to replace 70–80% of your pre-retirement income. If you earned $100,000 annually, you might need $70,000–$80,000 per year in retirement to maintain your lifestyle.
4% Rule
Estimate annual expenses, then multiply by 25. For instance, if you need $100,000 a year, you’ll require a $2.5 million nest egg (since 4% of $2.5M = $100,000).
Experts often recommend accumulating 15–25 times your current annual income to retire comfortably.
The Role of Inflation in Retirement Planning
Inflation reduces purchasing power over time. At an average U.S. rate of 2–3% per year, $1 today may be worth less than $0.50 in 30 years.
To offset inflation, retirees may use:
- Treasury Inflation-Protected Securities (TIPS)
- Dividend-paying stocks
- Commodities like gold
- Diversified investment portfolios
Our Retirement Calculator factors in inflation to provide more accurate savings targets.
Common Sources of Retirement Income
Social Security
A government program providing partial income replacement for eligible workers. Typically replaces about 40% of earnings. Benefits vary depending on lifetime income.
Employer-Sponsored Plans
- 401(k) and 403(b): Employer-sponsored retirement accounts, often with company matching contributions.
- 457 Plans: Available to government and nonprofit employees.
IRAs
- Traditional IRA: Contributions are pre-tax, withdrawals are taxed.
- Roth IRA: Contributions are after-tax, withdrawals are tax-free in retirement.
Pension Plans
Employer-funded programs providing guaranteed retirement income, though less common today. Still widely used in public sector jobs.
Investments and CDs
Mutual funds, index funds, stocks, bonds, real estate, and Certificates of Deposit (CDs) are common ways to grow retirement savings.
Personal Savings
Savings accounts, checking accounts, and money markets provide liquidity but usually fail to keep pace with inflation. Best used for emergency funds rather than long-term retirement.
Other Retirement Income Options
- Home Equity: Reverse mortgages can convert property value into retirement income.
- Annuities: Insurance products offering guaranteed lifetime income.
- Passive Income: Rental properties, dividends, royalties, or business income.
- Inheritance: Assets passed down to heirs, sometimes subject to estate or inheritance taxes.
Conclusion
Retirement is a major financial milestone that requires careful planning. By combining Social Security, employer-sponsored plans, IRAs, investments, and savings, individuals can create a stable income stream for their post-working years.
Use the Retirement Calculator at Capital One (capitlon.com) to estimate your savings needs, factor in inflation, and plan a retirement strategy tailored to your goals.