Retirement – How Much Savings Should You Have?
It is the question that many people desperately need to know, yet struggle to actually find out – How much money should I have saved for retiring?
If the answer were easy, few people would be so worried about retirement. Being able to read the future would make finding the money for retirement simple. Unfortunately, it’s impossible to predict the future, making planning for your retirement a complex problem, especially since you can’t even answer such questions as how long you will live (and be needing money), or what medical expenses await you.
However, you can set a functional retirement savings goal using a few tools and some educated guesses about the future. Here are the five steps you can take to start to figure out how much money you will need to retire.
1. Estimate your spending for the future.
Be warned, this step will require quite a bit of work. However, once it’s done, the others will fall into place easily. If you already have a budget you follow, your job will be much easier. The way to project your future expenses starts by looking at what you currently spend.
Jot down your monthly expenses on a sheet of paper or enter them into a spreadsheet. Use an average if your spending on certain things varies. Then, think about whether those entries are likely to remain constant, increase, or better yet, decrease, in the future. In an ideal situation, one example would be paying off your mortgage, eliminating that monthly expense.
In an adjoining column, estimate what each of those expenses will be when you retire. Then, list the things you may not spend money on now, but will once you retire. These could be things like travel, lessons in your favorite hobby, or mahjong. Add up your projected expenses for retirement, and you will have an estimate of what your monthly needs will be at that time. This can be tallied into an annual sum.
2. Decide how much income you will need using projected spending.
In a recent survey, the EBRI (Employee Benefit Research Institute) found that less than 50 percent of workers take the time to figure out how much they will need when they retire.
This means that half of the people reading this article won’t bother figuring out the amount outlined in the first step. That leaves income replacement as a general rule of thumb. It won’t be nearly as accurate, but it is better than having nothing. Just make sure when you use it, it is a general one-size estimate of an amount that has a great deal of variance from person to person.
The most often used estimate is considered the “80 percent rule,” and it says you should try to be able to replace 80 percent of your income pre-retirement. This isn’t the amount of money you earn now. Instead, it is an average of your expected income in the 10 years before you retire. You can find calculators online to help you make an estimation.
The rule is a loose one, and some people believe the number should be closer to 70 percent. Others think you should aim to replace 90 percent. A good place to figure out where you fit is to look at how much you are saving right now for retirement. Once you retire, you won’t be saving for it anymore. This means that if you are currently setting aside 15 percent, you will be able to live on 85 percent of your current income without changing anything else. When you include Social Security, you might be able to bring the number even lower.
These type of loose rules should be used as an estimate before doing a more detailed and tailored look into your expenses. You can figure out if you are close in your estimates or way off. Use it as a jumping off point before doing more fine tuning later down the line.
3. Use a calculator made for retirement.
If you stay truthful when entering your info, a good calculator will be able to give a rough assessment of how you are progressing with your savings by combining your entered estimates with income projections. A good calculator will have researched-backed assumptions included, these may include default estimates for life expectancy, market returns, and inflation projections.
If you want a very accurate result, make sure you consider if these assumptions are right in your individual situation. For example, are your investments going to return the default amount (usually 6-7 percent)? If you have bonds, you may want to adjust down. Do you have grandparents who lived beyond their 100th birthday? You have good genes, but they will be expensive.
All of these factors combine to figure out where you are pointed now and how you can improve your situation. Here are a couple of examples that used NerdWallet’s calculator for retirement.
If a 25-year-old has 10 thousand dollars saved and earns 50 thousand per year wants to replace half that income needs to have $2,800 in retirement. If he saves 12 percent of his current income, around 500 dollars per month, and has an employer who matches his money, he can retire by the age of 68.
If a person who is 35 has 30 thousand dollars saved and earns 70 thousand per year wants to replace that income, she will need approximately $3,670 per month to retire. Putting aside 17 percent of her income, or a thousand dollars per month will let her retire at the age of 68 if her employer matches her dollars.
These examples dhow one fact. The earlier you begin setting aside money for retirement, the less you will have to set aside both per month, and overall. This is where compound interest can make a difference. Unfortunately, the fees for investing will also compound, and NerdWallet research has found that this number can even hit $500,000. If you don’t know what your fees are going to be, you can input your 401(k) into an online analyzer.
Another thing to consider is that these percentages per year are usually an average. Some years you will have to put aside less, other years you may see extra money allowing you to increase your savings. Income and expenses tend to have an ebb and flow to them. The crucial element is putting aside as much as you comfortably can, whenever you can, and use tax-advantaged investment accounts for retirement. These include IRAs or a 401(k). If you don’t know which one is right for you, look online and learn the differences between 401(k) retirement accounts and IRAs.
4. Write down your plan for retirement.
You don’t have to make it fancy or do a formal account, but writing down the things you learned in the previous steps will help inspire you to stay with your plan. According to a top financial services company, LIMRA, half the people who have a concrete plan written out feel prepared to retire, while only 17 percent without a plan feel prepared.
This process is a long one, and it is too easy to justify purchases that benefit you in the short-term, thinking that they won’t impact your financial goals 30 years in the future. The thought is buy the fun thing today, save tomorrow, but often the future savings never happen.
Write out your plan to keep your goals at hand. Affix it to the front of your refrigerator. Include a photo of your dream retirement home on the beach or your favorite sweatpants that you can wear all day when your daily job is a distant memory.
5. Revisit your plans regularly.
Circumstances change all the time, and you will have to adjust your retirement plans to account for them. It may be a new addition to your family, a new job, or an expensive new hobby, make sure you re-evaluate your retirement projections often.
If you enjoy the process, you may even want to re-evaluate your numbers every few months, so you are always on top of your retirement. If you don’t enjoy it, even just once per year is enough. It will always be better to make small adjustments as they come up than struggle to recalculate everything later on.