What is the Right Amount to Save for Retirement?

There are plenty of calculators out there so I won’t bother with that, but the question to how much you need to save for retirement needs to be in your thought process. Saving for retirement is difficult when it matters most. Many people reading this are in there 20’s, 30’s and 40’s. The earlier you start to save the more you benefit from compounding interest. If you start saving around five thousand dollars a year and put it into an index fund returning about 8% in your early twenties, you will have nearly a million dollars for the time you are set to retire.

Let’s leave all the factors the same, but let’s say you start saving in your mid 30’s. You will be retiring with about 40% less than if you started ten years earlier. What this means is that you cannot wait to start saving tomorrow. The excuses run rampant for not saving and in a down economy with the unemployment rate through the roof I understand, but that does not mean that you should be doing nothing. Soon as you get your feet on the ground automatically have a portion of your earnings go into a bank account that you can eventually put into a Roth IRA. If your company matches a 401K and you are not using it, you are wasting out on tons of free money in retirement.

Saving is more important now than ever, but back to the title of this article… What is the right amount to save for Retirement? Well, that all depends. How much you make during the course of your life and your expectations for life when you retire.

Yearly Salary and Cost of Living

More than likely how much you make a year will have a direct affect on your plans for what you are going to spend yearly when you go into retirement. The estimate and quick down and dirty method I like to think of is: take your current cost of living by 80% and that is going to be around what you spend yearly in retirement. However, if right now you have a lot of debt and are paying that down and not spending much it may be easier to take your current take home salary by 80%. So, if you are spending 40,000 annually now, you should estimate to be spending AT LEAST 32,000 annually in retirement. However, having said that, this is a very rough estimate and likely by the time you retire inflation will make it so that 32,000 won’t get you quite as far. I wouldn’t take the chance, so I would over estimate if at all possible.

So, we will round up to 35,000 in retirement, now you need to find out how long you are going to live. Well, that is near impossible as new technology will probably allow us live much longer than we are currently expecting. If you are younger than forty, I suggest that you expect to live no shorter than 85. If you retire at 65, that leaves you twenty solid years to live off of retirement. Simple multiplication tells me you will need at least 700,000 dollars to live. Remember, once you retire you simply do not take out all your savings and will probably earn an interest rate of around 4-5% which will make up some of the difference as you go, but that will not keep up with what you will spend.

All in all, I find it very difficult to set a number to what you need to have for retirement as there are too many variables like income, children, geographical location, inflation rates and interest rates. Start saving now, let compounding interest work for you and try to build that nest egg to a comfortable amount and overestimate what you will need. Once you retire it will be much easier to find ways to spend extra money than to search for ways to bring extra in.

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