Will Your Retirement Savings Leave You Rich or Broke?

Social Security replaces about 40% of your work earnings when you retire and claim benefits, which is not very much. You don't want to try to live on your retirement benefits alone since they really aren't intended to be a sole support source for you.

If you're like most people and work for an employer that doesn't offer a pension with guaranteed monthly income, you're probably going to need a pretty hefty amount of money in a retirement account (like an IRA) to help see you through your later years. That's why it's important to make sure you're on track with your saving efforts so you won't find yourself falling short.

So, how can you know if your retirement savings will leave you rich or broke? Here's what you need to do.

Estimate how big your nest egg will be at the time of retirement

To determine if you'll be flush with cash or struggling to get by as a senior, you'll want to figure out what amount of money you're likely to have available to you as a retiree.

There are plenty of calculators online that you can use to help you do that, including one on Investor.gov. Just input:

• The amount you have invested
• The monthly contributions you plan to make
• The number of years until retirement
• The estimated interest rate (around 10% is reasonable)

Say, for example, you currently have $25,000 invested, you plan to make monthly contributions of $300, and you have 20 years until retirement. You could use this calculator to determine you're likely to end up with about $374,377.50 in your brokerage account or other retirement plan.

Choose a safe withdrawal rate

Next, you'll want to estimate a safe withdrawal rate. That's the amount you can take out of your retirement accounts without going broke by draining your balance too fast. Generally, taking out about 4% or less of your account balance the first year and adjusting up for inflation after that is a good rule of thumb.

If you chose 4% as your withdrawal rate and you had $374,377.50 in your investment account, your investments would only give you $14,975.10 per year. Even when combined with Social Security (which has an average monthly benefit of $1,907 in 2024), that may not give you enough to maintain your lifestyle.

Determine if you can afford your preferred lifestyle at a safe withdrawal rate

The last step to determine if your retirement savings will leave you rich or broke is to anticipate whether your savings will give you enough to live the way you want.

Most experts recommend you replace a minimum of around 70% to 80% of pre-retirement income, but some people need more if they want to travel a lot or if they have expensive medical needs. If you anticipate you'll be making $85,000 per year at the end of your career and you want to replace 80% of that, you'd need your savings and Social Security to add up to $68,000. So you'd likely be far short if you just had Social Security and minimal savings to live on.

If this calculation shows that you won't have enough to replace the required percentage of income, you probably won't be able to maintain your lifestyle as a retiree. You can start saving more now to give yourself a better future -- or begin making plans for a drastic reduction in cost of living, perhaps by moving to a cheaper area. If you don't want to close off future options to yourself, start saving more now so you can get on the path to being rich instead of broke as a retiree.