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Are You Saving Enough For Retirement?

What if you lost your job today and couldn’t find work for 30 years?  It’s a scary thought but it’s reality when you get to retirement age.  There will come a time in your life when it’s not reasonable to continue to work. Either by choice, medical reasons, or layoffs your last day of work will come someday.  Will you be ready?

The earlier you start preparing for retirement the easier it is.  But how much should you be saving?  Experts say to save 15% of your income.  That’s a nice rule of thumb but will that really do it for you?  Do you need to save more?  Can you save less?  Your needs might not follow a rule of thumb.  So let’s dig in and see exactly what you need to be saving for a happy retirement.

There are a couple of things you will need to know in order to run the calculations.

How much income per year do you need in order to live?  Your budget in retirement will be similar to your budget now, except that the kids will be grown, the mortgage will be paid off (hopefully!), and you won’t have work expenses.  Figure out your monthly budget needs and multiply it by 12 to get the annual costs.  Don’t forget about taxes!  You can use this calculator to give you an estimated tax bill.  I did a rough calculation and came up with $2,300 if you were to have an income of $40,000.  If you will be pulling money out of a Roth IRA you won’t have to pay income taxes, but you will on a traditional IRA or 401(k).  Add your tax bill to your annual income needs to get a grand total.

How long will your retirement will be?  For example; if you want to retire at age 65 and you plan to live to be 100 you will be retired for 35 years.

What is your after tax rate of return in retirement and expected inflation rate?  Ok, non-finance people won’t have a clue as to what to put in here.  Don’t worry.  The calculator has this info pre-filled so if this part freaks you out just use what they suggest.

Finding the Magic Number

Ok, now that you know your assumptions you can get started on finding out what your magic number is.  This is the number you need to hit to meet your income goals in retirement.  To find this number you can head over to this calculator and start playing around.  Enter in how much you want to withdraw each year and change inflation and return rate if  you don’t like what is already there.  Then change the “savings at retirement” number until your savings will last your entire retirement period.

Figuring Out How Much You Need To Save Per Month

Next we need to break the nest egg down into a monthly savings goal.  Head over to this savings calculator and plug-in your assumptions.  It will ask you for your starting amount, which is how much you currently have saved for retirement.  It will also ask for years, which how long you have until you retire.  Lastly, you will need to estimate your annual rate of return.  If you have 20 years or more I would estimate 10%.  The smaller the time frame the lower return you should estimate because as you get closer to retirement the less risky investments you should have.  Less risk means less reward.

Once you have your assumptions plugged in play around with the monthly contribution until the total equals your magic number.

Find Room in the Budget

If your monthly number seems out of reach it’s time to hit the budget.  Can you find any extra in your budget that you could put towards a safe retirement?  Could you start a side job or earn more money at your current job?  It’s important to start saving early.  You might not like the answers that you come up with when looking for extra in the budget but delaying your savings only makes things worse.  Go back to the savings calculator and change the number of years down a few.  You can see the impact that will have on the quality of life in retirement.   So it’s important to make the sacrifices you need to make now so that you can have a happy retirement later.

Review Annually

After doing this exercise you might feel like this isn’t very scientific.  You’re right, it’s not.  Predicting the future is a tough thing to do.  That’s why it’s a good idea to run this every year so that you can make adjustments as they become necessary.  Better to make small adjustments every year then to wait until you are 60 to find out your assumptions were way off.

4 comments… add one

  • Financial advisor March 8, 2012, 7:12 am

    The retirement plan is very important, and one of the key part of the plan is the age when you start save money. Ideally, you’d start saving in your 20s, when you first leave school and begin earning paychecks. That’s because the sooner you begin saving, the more time your money has to grow. Each year’s gains can generate their own gains the next year – a powerful wealth-building phenomenon known as compounding.
    Here’s an example of what a big difference starting young can make. Say you start at age 25, and put aside $3,000 a year in a tax-deferred retirement account for 10 years – and then you stop saving – completely. By the time you reach 65, your $30,000 investment will have grown to more than $472,000, (assuming an 8% annual return), even though you didn’t contribute a dime beyond age 35.
    Now let’s say you put off saving until you turn 35, and then save $3,000 a year for 30 years. By the time you reach 65, you will have set aside $90,000 of your own money, but it will grow to only about $367,000, assuming the same 8% annual return. That’s a huge difference.

  • MyMoneyDesign April 20, 2012, 8:49 pm

    I saw this post as one of your tweets today. I agree that the basics of retirement really are just as simple as figuring out how much you think you’ll need and then saving for it month by month. As the calculator demonstrates, compound interest can play a huge role in this. I wish people would take advantage of saving and the power of compound returns sooner!

  • Claudette September 19, 2012, 12:38 am

    wonderful submit, very informative. I wonder why the
    other experts of this sector do not notice this. You
    must proceed your writing. I’m confident, you’ve a huge
    readers’ base already!

  • JMK January 8, 2013, 12:55 pm

    Love that calculator.
    One thing I always think gets missed in calculations of how much to save for retirement is when do you want to really want to retire. Yes, the standard recommendation of 10-15% is great. As a starting point; a bare minimum. It’s intended to get you to retirement at 65. I don’t know about you, but given a choice most people would choose to retire earlier than that. A brand new graduate with no kids/house/car debt has a golden opportunity to continue to live modestly and sock away considerably more than 10-15% of even an entry level salary. You likely lived on very little as a student, and if you can focus on the long view and convince yourself to continue on a similar path, you have the option to write a very different future for yourself. Once you load yourself down with a mortgage, kids and a couple of car loans, the opportunity to set aside a massive amount in savings every month has likely vanished for 20-30yrs (until the mortgage has been paid off and you are at your maximum earning levels). Planning to do your major saving between 55-65 may work for you but it’s a risk. If you can have the foresight to save 30-40% of your salary (or live on one, save the other) right from the start, you could be retiring in your 40s. Something to think about.

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