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Frequently Asked Questions: 401(k)

How much do you need for retirement?

My answer is as much as possible. However, we need to be realistic. We have to balance the current requirements versus savings for future needs.

A place to start is to roughly figure out when is a reasonable age to retire. For example, is 65 a reasonable age? The next step is to figure out whether you need more or less than your current income to retire comfortably.

Depending on your personal situation, an average person requires about 80% of pre-retirement spendable income. Spendable income is close to take home pay which is much less than your gross pay. For example, an employee with $50,000 gross pay, pays $10,000 for income taxes, contributes $10,000 for 401(k) plan, medical, dental, mortgage, would have a spendable income of $30,000. Thus this person would require about $24,000 a year to retire.

You need to adjust the 80% according to your needs. For example, if you have an expensive hobby, you will need to increase this ratio. If you need extra medical attention, you will also need to increase this ratio. If you are living with a spouse and does not require much to live on, then you can lower this ratio. I like to fish. With a couple of dollars of minnows a day, I am a happy man. A little planning now will go a long way.