Your Retirement Fund: Setting Savings Goals

How Much Money Should I Put Away for Retirement? Is the Issue on Everyone’s Mind

As a rule of thumb, most financial gurus advise setting aside 10%-15% of your annual pre-tax income for retirement savings. The range’s upper end is where most high earners desire to be, while low earners may get by closer to the range’s bottom knowing that Social Security will replace some of their income.

However, the ideal recipe does not exist. Your retirement objective should take into account both the known and unknown aspects of your future, such as:

  • Your life expectancy
  • Your current spending and saving levels
  • Your lifestyle preferences in retirement

How much money you need to save up for retirement may be calculated in four easy steps.

1. Estimate Retirement Income Needs

Fair warning: This is the hardest part, but if you can get through it, the rest will be easy. And even a rudimentary budget can give you an advantage. Looking at present spending is the first step in estimating future income needs.

To do this, first list or write down your normal monthly expenses in the first column of a spreadsheet. Then, consider if each expense will be the same, less, more, or ideally, eliminated after you’re no longer working. Make an educated guess as to how much money you’ll need for each expense in retirement in the second column.

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Add them up, and then throw in some extras like travel that you might not be able to afford right now but would like to in the future. Then, you’ll be able to predict your future monthly budget demands with some degree of accuracy. To calculate the annual retirement income required to cover those costs, simply multiply the total by 12. Find out what percentage of your present salary you should plan to replace in retirement by comparing the two figures.

2. Consider Common Rules of Thumb

The poll of American workers’ confidence in their ability to retire with sufficient funds was conducted by the Employee Benefit Research Institute in 2023. This is decreasing from 73% in 2022. In addition, 62% of the working population has stated that debt is a major issue.

Financial rules of thumb might be helpful if you need to make changes to your retirement plan due to debt, rising costs, job loss, or any other financial difficulty.

The most common concept is the “80% rule,” which states that in retirement, one should seek to replace 80% of their pre-retirement income. This is a general guideline; some people advocate for a more liberal 70%, while others advocate for a more conservative 90%.

Think about how much of your salary is going into retirement savings to get a sense of where you stand. If you are now saving 15% of your income, you will be able to comfortably live on 85% of your income without making any adjustments once you reach the hypothetical end point. If you include in Social Security and reduce payroll taxes (which consume 7.65 percent of your income while you work), you may likely reduce your income even further.

A rule of thumb like this is useful for comparing your spending habits with the more precise results of a detailed analysis of your finances. How far do you disagree with conventional wisdom, if at all? However, it can stand on its own as a jumping off point from which the figures can be adjusted.

3. Use a Retirement Calculator

A good retirement calculator will evaluate your savings success based on your assumptions about future spending and your estimated annual spending. Defaults for inflation estimates, life expectancy, and market returns are included into most comprehensive calculators.

You should think about whether such assumptions are reasonable in light of your situation before proceeding on. Do you think your investing strategy can achieve the 6%-7% annualized return that most calculators utilize by default? You may wish to reduce your exposure to bonds if you have a bias toward them. Did any of your ancestors reach the age of 110? Your superior genes come at a high cost. Think about the possibility of living longer than expected.

4. Revisit Regularly

Your requirements for retirement will evolve as your life experiences do. It makes sensible to repeat these retirement calculations on a fairly regular basis, whether it’s because of a new career, a new baby, or a new ambition to tour the world beyond age 65. It’s preferable to make changes as you go along rather than having to play catch-up later.

Help with budgeting is readily available if you’re having trouble keeping everything in check. You can choose from fee-based traditional financial advisors to fee-free internet robo-advisors. Find out more about what to look for in a reliable financial advisor.

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