How much do you really need to save for retirement? Everyone needs to prepare their own future and make plans of how they can afford themselves during their retirement days. Retirement is the time where you no longer productive (or working) so you can enjoy your golden years. However, retirement won’t be fun or enjoyable anymore if you don’t have the money to finance yourself and your life. How are you going to afford yourself if you don’t work anymore? That’s why it’s crucial to make plans from now.
Getting Ready for Retirement Days
A crucial part of solid retirement plan should answer the question “How much do you really need to save for retirement?” To be honest, there is no right or wrong answer to it. The answers would vary, depending on the individual, the lifestyle, and also your income. When you are able to stay on the solid path all along and you really know how much you need, then you are on the right track. But you need to start at some point, right? So, here’s how you can begin with your saving plan.
How Much Is Needed for the Retirement Time?
A lot of financial experts state that the solid retirement income should be around 80% of the final (pre) retirement annual income. Let’s say that you have an annual income of $100,000, it means that you need to have $80,000, minimum, for each year so you can have a convenient and comfy lifestyle, even after you aren’t working anymore.
So, the 80% is basically the amount of how much do you really need to save for retirement, but then again, you can adjust it depending on your needs and your income. Feel free to adjust it up (or down), especially if you have other income sources, like part-time employment, pensions, or Social Security. You should also think about your desired lifestyle and health. Some people I know still have some activities during their retirement days. Some of them turn into freelancers, which they are doing for free and in a relaxed manner. Some of them turn into part-timers, where they can still enjoy free time but still be able to do the things they love.
Moreover, you still need to think about the activities you need to do later. Are you planning on traveling a lot? Do you have a certain medical condition or health issues that may need extra costs or spending? If all the answers are yes, then you need to figure out a way to get extra income.
The 4% Rule
There is no fix way to determine how much do you really need to save for retirement. One way to do it is to use a 4% rule, which is to divide the wanted annual retirement cost by around 4%. Taken the example of the previous $80,000 annual cost, you will have to ‘nest the egg’ at around $2 million (taken from $80,000 / 0.04). This strategy is assuming that there would be 5% of return on investment (after the inflation and taxes), no extra retirement income, and you will maintain the same similar lifestyle as today (which may be not about being fancy or no traveling so much).
You also need to remember that you should factor in the life expectancy within that 4% rule. This 4% rule is ‘assuming’ that you may live up to 30 years in the retirement period. If you expect to live longer, then your plan should expand. Don’t forget to include medical costs (and other expenses) as the years add-in.
This 4% rule is perfect for those who can be disciplined. In the event that you are an impulse spender that may splurge in making big buying purchases, then this won’t be the perfect one for you. Excessive and overspending can hurt the principal, leading to the compound interest being affected and hurt along the way.
Making the Plans
Knowing how much do you really need to save for retirement can help you plan out your life, in every step or stage. How do you plan it out properly and smartly?
- Salary’s percentage. According to Fidelity Investments, saving around 15% of the gross salary can be helpful, especially if you start from your 20s, and it will take place continuously until your working life. You can have various retirement accounts as well as employer contributions (like 401k) or other plan with employer sponsored basis).
- Annual earning and age. By the time you reach 30 years of age, you should have 1x of annual salary for your retirement cost. By the time you reach 40, it should be 3x of the annual salary. When you reach 50, it should be 6x of the annual salary. When you are 60, it should be 8x of the annual salary. When you are 67, it should be 10x of the annual salary.
There is another alternative if you want to know how much do you really need to save for retirement. You should have around 25% of the annual gross salary, which should start in your 20s. The figure may seem like too much, but you should remember that it includes 401 (k) holdings as well as other retirement savings types. If you do it right, you should be able to get the following yield:
- You should have 2x of annual salary by the time you are 35 years old
- You should have 3x of annual salary by the time you are 40 years old
- You should have 4x of annual salary by the time you are 45 years old
- You should have 5x of annual salary by the time you are 50 years old
- You should have 6x of annual salary by the time you are 55 years old
- You should have 7x of annual salary by the time you are 60 years old
- You should have 8x of annual salary by the time you are 65 years old
The Real Facts
Retirement experts said that many people have come to them to find counsel related to their retirement funds. Some people may need to save up to 80% of their (annual) pre-retirement income, while others need to save up to 12x of their pre-retirement salary. Some people need to save almost up to $1 million to life comfortably, while others only need half of it. So, which one would be the right one for you?
Here’s the fact: Retirement researchers can’t even put the correct total amount for how much do you really need to save for retirement because there are different variables to consider. For a starter, the current age is only one of the many contributing factors when you start to plan, and also WHEN you want to retire. Moreover, there is also a forced retire because of job loss, declining health, and other things you can’t control. Not to mention that you should also factor in your family history, your lifestyle when in retirement (also refers to lifestyle), what your retirement source is, whether you will still be working or not, and how long your life expectancy is.
It may surprise you that generously sized accounts can actually deliver quite positive potential in your retirement funds. Here’s an example of how much money a retiree can get from their accounts if she/he does it when they are 65 years old.
- If they have saved $12,000 a year, they can potentially get $300,000
- If they have saved $40,200 a year, they can potentially get $1,000,000
- If they have saved $60,300 a year, they can potentially get $1,500,000
This is just an example of how much you can save (and get) when you retire. However, it also depends of your starter year. The earlier you start, the more money you can enjoy. Naturally, you can get more retired fund when you start saving in your 20s than in your 30s. That’s why you should start your retire fund as soon as possible. But financial experts also state that there is no such thing as being late when it comes to save. What’s count is that you save. Having a little saving is better than having none at all.
Facts about Working during Retirements
A lot of people plan on working during retirement so they can save less now. However, they should be realistic about it. EBRI (Employee Benefit Research Institute) did a Retirement Confidence Survey annually, and they found out that a lot of workers expect to work during retirement, but they end up not doing so. In their latest report, EBRI reveals that 72% of the workers had plans to work in retirement, but only 30% that actually works.
So, if you are hoping to still be working during your retirement days, don’t get your hopes high. Many financial experts stated that it’s always best (and wise) to save as much as you can today, than to depend on something unclear in the future. There is nothing wrong about saving. Even if you don’t run a lavish and luxurious lifestyle in your golden years, having a saving will definitely give you a peace of mind.
Does it mean that you shouldn’t work in retirement? Working during retirement is really about personal preferences. Some people still love doing it, while some don’t. Some people like it to stay busy and productive, while the others prefer enjoying their slow-paced life. Feel free if you want to work. If you have skills, experience, and expertise (especially the rare ones), it’s most likely that people will still turn to you. However, working in retirement should be about something that you ENJOY doing; not something that is forced because you need to bring food to the table. If you still love working, be my guest! But do it for the sake of your own enjoyment, not because you are forced to do it for a living.
How to Save for Your Retirement
If you really want to know how much do you really need to save for retirement, it’s better to work with a financial planner or a financial advisor. They will look into your finance and help you manage your retirement plan. They would look into your history, financial reports, and everything, and they can help you decide on how much money you can set aside on a monthly basis to cover for your retirement.
Moreover, saving is about discipline and determination. If you want to really enjoy your life in your golden years, then start early. If making several sacrifices worth it, then do it. Remember, having money gives you a sense of freedom and pride, and if you can live comfortably while enjoying your retirement, then why not. Start now. Find out exactly how much do you really need to save for retirement and act now, before it gets too late.