What may be comfortable for one individual may not necessarily be comfortable for the next. In fact, we all have a different set of circumstances, wants and needs. Therefore, you need to adapt your long-term goals to your own personal situation and aspirations.
But the one common question that everyone asks is “how much money do I need to retire on“. In the following content below I will guide you into understanding just how much you need for retirement.
Save and Put Away as Much as You Can
The main purpose of saving for your retirement, and your retirement fund, is for you to save up enough money to enable you to have a regular comfortable income after you have reach your inevitable retirement. One of your main goals when you retire is to try to maintain the standard of living that you were used to during your pre-retirement.
But this still doesn’t answer your question, how much do I need to save for retirement? Most professionals in the retirement planning industry agree that when you retire you should have enough money/capital saved up to give you a minimum income equal to 75% of your last income before you retire. So for example, if your last monthly income before retirement was $1,000 then your first retirement income should be $750.
Please remember that this initial income also needs to increase annually to keep up with inflation to maintain the purchasing power of your income (this is the main reason we all need annual increases on our household income.
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Reasons Why you Don’t Need 100%
Many of you might be asking the question, but why wouldn’t I need 100%? The reasons that you don’t need 100% of your pre-retirement income to maintain your current standard of living before you retire include:
- you pay less tax in your retirement
- you are no longer saving towards retirement
- you are no longer traveling back and forth to work and home everyday
- remember one your retirement goals? – you should be Debt Free
- ideally you should now own your own home and aren’t paying rent
- your children have moved out of the nest and are no longer financially dependent on you
What You Should be Saving
I don’t know your exact age as you are reading this. The reason I am mentioning this is because your age when you start saving will determine how much you should save towards retirement. The following will show you how much money you need to save now to replace 75% of your pre-retirement income when you retire.
The above table assumes that you start saving from the “current age” and that you haven’t built up any retirement savings. These projections also assume that you achieve a “moderate” (+/- inflation + 4%) real rate of investment return on your savings.
Plan Ahead for Retirement
Planning ahead for retirement will give you an idea of what you will need to save for your retirement and the ability to do something about it now. I will help you decide the following:
- how to preserve your savings and spend it before retirement
- what contributions you should make towards your retirement savings and your contribution rate should be
- if you need to save more and where if you are not on target for your 75% goal
- give you an idea of what you will need to save for retirement
Remember that seeking assistance will help you achieve your retirement goals.
Risks That Can Affect Your Retirement Savings
Early planning towards your retirement and estimating your retirement income are important. But there are some retirement savings risks that you need to be aware of. Here is a summary of those risks:
- Unexpected Life Events – natural disasters, having an accident, victim of a crime
- Market Volatility – macro economic factors affecting your investment portfolio & the performance of your investment
- Healthcare Needs – illness, disability or becoming disabled
- Longevity – no one knows how long we will live for, the longer we live the longer your retirement savings needs to last.
Focusing on Longevity Risk, this risk can lead to a number of other risks that you should also take note off:
- Inflation Risk – inflation determined the buying power of your money. When planning your ideal retirement income always remember to take annual income increases into consideration. Retirees living on a fixed income, rising prices of goods and services will erode away the purchasing power of your money. The Rule of 72 is applied here to give you an idea of the effect inflation has on your income. If your fixed income is $1,000 per month today, and the inflation rate is 4%, your $1,000 income will half in +/- 14 years (72 / 4 = 14). This means that a fixed income will buy half of what it could in 14 years time.
Know Your Retirement Income
Reaching retirement age and knowing that you have not properly planned for that date can be extremely stressful. Hopefully you will now be in a better position to better understand what your retirement income should be in order to give you a comfortable standard of living. This in turn will enable you to determine how much you need to save for retirement.
Please remember to leave a comment below if you have any questions or queries to assist you on reaching your retirement goals.