Everyone knows retirement is coming. One day. But we don’t like to dwell on the fact that it will be here sooner than we think. If we don’t save sooner than later, we might well approach our golden years without enough money to fund them. To prevent this, we must all be asking ourselves one question: how much do I need to save for retirement?
There are several different schools of thought when it comes to figuring out how much you should save for retirement. But it doesn’t have to be super intimidating! It all comes down to answering a couple of basic questions.
How Much Will I Need to Live Each Year?
The first thing to ask yourself is how much will you need to live off of each year. Hopefully, by the time you reach retirement age, the home mortgage will be paid off, the cars will be paid for, and college expenses will be behind you. And another major monthly expense, saving for retirement, will no longer be necessary because you will be, well, retired.
Some of these financial breaks will be balanced out with other needs. You will probably need long-term care insurance. Or maybe you want to be intentional with traveling the world in your retirement years. And we can definitely count on higher health insurance costs in the last few decades of life.
Keep in mind: There is no way we can adequately predict the future. All we can do is our best at estimating future costs.
Add up what you think all of your bills will cost each month. Gas, water, electricity, food, cable, internet, health insurance, car and home maintenance, travel, etc. Then multiply that number by 12 to get your best educated guess on your future yearly expenses for your retirement years.
How Long Will I Be Retired?
Another thing to think about is how long you think you will be retired. Due to modern medicine, people are living longer than ever. A century ago, people didn’t even retire! They just worked until the day they died, usually somewhere in their fifties or sixties.
Today, some people can expect to live well into their eighties or nineties. Which is amazing when it comes to watching your family grow and loving on all your grandbabies! Not so amazing for your wallet if you only planned on living five or ten years after you retire.
Spend some time thinking about how long you will be retired. If you retire at 65 and live until 90, that is 25 years in retirement. Or if you aim to retire early, age 55 or even 50, you will need to have saved enough to cover expenses for 35 or 40 years in retirement!
Unless people have been diligent for a very long time and have saved intentionally for it, early retirement just won’t be an option for most families. I DO think EVERYONE can retire early, but ONLY if they plan for it and save aggressively. Hopefully, you love what you do and retirement isn’t just about quitting a job you hate. (And if it is, maybe you should think long and hard about getting another job!)
Figure out what will be the best fit for your family. Personally, I prefer to err on the side of caution. It would be better to save more and not need it, than to not save enough and live longer than expected.
How Much Will I Need to Save Before I Can Retire?
There are a few ways to guarantee you are saving enough to retire comfortably.
1 – Take your yearly retirement expenses, and multiply that number by the number of years you plan to be in retirement.
Again, assume you will live a long time. This is an easy way to find a good overall picture of how much to save.
This is definitely an easy method, but it does have some drawbacks. For one, inflation will factor into your savings. As inflation rises, the value of our money decreases. Think about what $1.00 would have bought 50 years ago compared to what that dollar will buy today. $100,000 is a lot of money right now! But in 50 years, it will really only buy what $70-80,000 would buy today.
2 – Salary x 25
Another popular rule of thought is to take your CURRENT salary that you are living off of right now, and multiply that by 25 to get a good estimate. This will cover about 25 years (ages 60-85) in retirement. Remember: if you plan on retiring early, say age 55, you will want to multiply your salary by 30, or however many years you plan to be in retirement.
3 – The 4% Rule
This is by far one of the most popular theories out there. It has been widely tested, and most finance bloggers who track their net worth online (those brave souls!) attest to using this theory to gain Financial Independence. It’s actually pretty intriguing.
Basically, the 4% rule says that IF you save at least 25 times your income and IF you only withdraw 4% of those savings to live off of each year, you should have more than enough savings to last throughout your golden years. AS LONG AS you only withdraw 4% of your savings to live off of each year!
Due to the yearly rate of inflation (about 4%), your savings should grow at least 4% each year. By only withdrawing 4% each year, your savings should stay intact and last as long as you need them.
“Salary x 25” and “the 4% rule” are very similar at first glance, but there is a fundamental difference. “Salary x 25” refers to how much you have saved, and “the 4% rule” refers to how much can be taken out each year in retirement.
How Do I Know If I Am On the Right Track?
“All that sounds well and good, Krystal, but how in the world do I know if I am on track to save that much?” I’m so glad you asked…
1 – Retirement calculators
There are retirement calculators online that will tell you how much your savings will be worth after a certain number of years and a certain percentage of compound interest. No one knows exactly how much interest will be earned based on the stock market. But 8% is a safe assumption.
My favorite retirement calculator can be found on Dave Ramsey’s website. The Dave Ramsey Retirement Calculator is simple and easy to use, and you can change the numbers around to get a better idea of your savings goals. Play with things a little bit. It’s amazing how much of a difference an extra $100 a month will make. Or even an extra percent of interest.
2 – Set your savings up to be automatic
Protect yourself from yourself and make it automatic. As soon as you are paid, pay yourself first for retirement. Then pay your other bills. Whatever is left is your play money.
Warren Buffett says those who achieve wealth are the ones who do not save after spending, but who spend after saving. And he is so right!
If you want to move into your kids’ in-law suite when you retire, have at it. If you don’t, you have to be serious about your savings. Right NOW!
3 – Track your progress to see if you are on target
If you are looking for a concrete number to save based on your age, this post from Fidelity has a chart that might help. By the age of 30, you should have one year’s salary saved. By the age of 35, you should have two years’ salary saved. By the age of 40, you should have three years’ salary saved.
For every five years, your savings should increase by one year’s salary. This is just a guideline, but it is a good starting point.
- Age 30 1x salary
- Age 35 2x salary
- Age 40 3x salary
- Age 45 4x salary
- Age 50 5x salary
- Age 55 6x salary
- Age 60 7x salary
- Age 65 8x salary
With the help of compound interest, these savings should grow to a nice nest egg come retirement time.
You CAN retire comfortably! The trick is to get started now! If you feel behind, that’s okay. I do too! But wallowing in excuses and hiding behind “shoulda, woulda, coulda”s never helped anyone achieve anything.
Instead of wishing you had done things differently five years ago, recognize that you can’t change anything about the past. You can only change your tomorrow. AND you can only change your tomorrow if you start TODAY!
Let’s do this
- Pull out your calendar and make a financial to-do list.
- Increase your 401(K) at work.
- Learn the difference between a Roth IRA and a traditional IRA. Figure out which one is best for you, then open one!
- Do one thing every day to help you reach your goals. It doesn’t have to be intimidating.
- Make it simple. Keep it simple. You’ve got this, friend!
All you can do is your best. Please, please, please don’t let this post discourage you! Instead, let it inspire you to do something today, however small it may seem, to prepare your family for a better tomorrow.
What about you? I would love to hear your approach to retirement savings.
Check out my other Investing Posts to read more practical tips about DIY investing and advice on how to get started with your retirement savings.