Knowing how much to save for retirement can be hard. You don’t know exactly what your expenses will be, how much return you’ll make on your investments in the meantime, nor how long you’ll live. A lot also depends on your current income and the lifestyle you want to have in retirement.
That said, there are ways to help ensure you can retire comfortably. In this article, we’ll go over some of the most common ways to calculate how much to save for retirement.
Let’s get started!
1. The 80% rule
The 80% rule states that you should plan to live on 80% of your current salary in retirement. Why 80%? Because it assumes you will no longer need to save for retirement and can live on a slightly less income as a result.
So if your current income is $100,000, you should plan to spend about $80,000 per year in retirement ($100,000 x 0.8 = $80,000).
Your retirement income can include Social Security, pensions, investments, rental income, and any other sources of income like part-time work from consulting.
2. The 4% rule
Another way to estimate how much you’ll need for retirement is to go off the 4% rule. This states that you will need to withdraw 4% from your retirement nest egg every year, assuming you live for 30 years in retirement (according to usa.gov, men live about 18 years in retirement, while women live about 20 years).
So if you expect to need an annual income of $80,000 in retirement, withdrawing only 4% from your nest egg every year would mean that your nest egg must be worth $2 million ($80,000 ÷ 0.04 = $2 million).
Another way to calculate this is to multiply your desired annual retirement income by 25 ($80,000 x 25 = $2 million).
3. The 15% rule
Still not sure exactly how much you should save for retirement each month? Then consider following the 15% rule, which states that you should save at least 15% of your gross monthly income toward retirement.
This may seem like a lot, but if you focus on cutting unnecessary spending, it’s definitely doable. Your retirement savings can include contributions to a 401(k) matched by your employer as well as contributions to traditional and Roth individual retirement accounts (IRAs) and even health savings accounts (HSAs).
Changing factors to consider
Of course, none of the above rules are perfect. They are merely intended to give you a place to start in determining how much to save for retirement.
If you want a more accurate estimate of how much to save for retirement, consider consulting a financial planner or using an online retirement calculator. They can help you see if you’re on track to retire the way you want to.
They may also be able to help you better account for variable factors. For example, you may spend much less than 80% of what you currently do because you won’t have a mortgage to pay for. Or you might spend more than 80% because you plan to travel a lot.
In addition, your healthcare costs may go way up because you need long-term care. Though you can offset some of these costs through programs like FreedomCare, which pays family members to take care of you, long-term care may still be an expense you should plan for.
And don’t forget to factor in inflation, which decreases the purchasing power of your money. In other words, $100 in 30 years won’t go as far as $100 does today. To be safe, it’s always best to assume an annual inflation rate of 3%.
Final Thoughts:
Saving for retirement isn’t an exact science. But saving early is always better than waiting. You can start now by investing in a target-date fund through a tax-advantaged retirement account like an IRA or 401(k). Target-date funds are index funds that reallocate your investments from high risk / high reward to low risk / low reward the closer you get to retirement age. That way, you can sit back and relax as long as you make regular contributions.
Many people are putting off retirement because they haven’t saved enough money in order to quit working. To avoid a similar fate and to ensure you don’t outlive your income, start saving now. You’ll be glad you did when you look back thirty years from now.
