According to research, the majority of Americans aren’t saving enough money for their retirement. The National Institute on Retirement Security says that more than 75% of Americans have retirement savings that fall short of the conservative saving target, while 21% don’t have retirement savings at all.
Whether you are employed or in business, you need to keep in mind that the golden years of your retirement can either be difficult or easy, depending on your retirement planning strategies.
One of the biggest questions you need to answer as part of your retirement planning is; how much money do I need to save for my retirement? The earlier you answer it, the better because you will have enough time to try and achieve your target.
So, how much money do you really need to save to enjoy your retirement? This article takes a closer look at the main retirement saving guidelines to help you understand how much money you need to save for your retirement.
How Much Should You Save for Retirement?
Retirement experts have developed various rules of thumb about how much you need to save for retirement. Some say you need to save 80%-90% of your annual pre-retirement income; others put the figure at around $1million, while others talk of 12 times your pre-retirement income.
However, the truth is that there are so many variables that affect your retirement, making it quite difficult to establish how much money you need to save.
Technically, what each individual needs to save varies widely based on a wide range of factors such as your current age, the age at which you plan to retire, how long you expect to live based on your family history, what your sources of income will be once you retire and how much you plan to spend in retirement.
Generally, the amount of money you manage to save for your retirement and how long it may last will depend on how much you save every month and how you invest the money. So, the earlier you start your retirement planning and saving towards it, the better.
What Do Most Experts Say?
Most experts say that your retirement income should be approximately 80% of your final pre-retirement salary. For instance, if you are employed and make about $10,000 per year, you need to be saving at least $80,000 every year if you want to live a comfortable life after exiting the workforce.
You can always adjust this amount upwards or slightly downwards depending on your expenses and other sources of income such as part-time employment, pensions, and social security. For instance, you may need to save much more than that if you plan to travel extensively during retirement.
The best way to determine how much money you need to save as part of your retirement planning strategy is to look at your current income and try to project what you expect to spend in retirement. Once you have a rough idea of how much money you expect to spend in retirement, set it as a saving goal and start working towards achieving it.
Retirement Planning and Savings: Understanding the 4% Rule
There are different ways of determining how much money you need to save for your retirement. One of the easiest formulas is to divide your desired annual retirement income by 4%. This is popularly known as the 4% rule.
So, if we stick to the example we provided above, to generate the $80,000, you will need a nest egg at retirement of approximately $2 million (That is $80,000 divided by 0.04).
This simple strategy assumes a 5% return on investment, no additional income, and a lifestyle quite similar to the one you will be living before retirement.
However, you need to remember that the 4% rule won’t work unless you stick to it year after year. Failing to hit the target for just one year can have far-reaching consequences on your retirement planning and savings because it will impact the compound interest you depend on to sustain your income.
A More Aggressive Retirement Saving Formula
Besides the 4% rule, there is another more aggressive saving formula that dictates you save at least 25% of your gross annual income every year starting in your 20s. Although the 25% may sound daunting, keep in mind that it includes 401(k) savings or any other matching contributions from your employer.
If you are disciplined and follow this saving formula, you should have accumulated your full annual salary before or at 30. Continuing to save at the same rate after 30 should yield the following results:
- Age 35: Double your annual salary.
- Age 40: Triple your annual salary.
- Age 45: Four times your annual income.
- Age 50: Five times your annual salary.
- Age 55: Six times your annual earnings.
- Age 60: Seven times your annual salary.
The 15% Rule
Besides the two saving formulas outlined above, some financial planning experts recommend saving a specific percentage of your salary to grow your retirement savings. Most of them suggest saving between 10% and 15% of your pre-tax income every month.
If you are a high earner, your target should be to hit the top of the range, while low-income earners should try as much as possible to stay closer to 10% since Social Security may replace some of their income.
Unfortunately, research shows that a majority of Americans contribute less than 10% of their salary to their 401(k). So, if you are among these individuals, you need to re-evaluate your retirement saving strategy.
Generally, you should target to hit the following goals with this retirement saving formula:
- Age 40: You should have saved double your annual income.
- Age 50: You should have saved at least four times your current annual salary.
- Age 60: You should have saved six times your annual salary.
- Age 67: You should have saved up to eight times your annual income.
The Importance of Time on Retirement Savings
Time is your most potent weapon when it comes to retirement savings. Typically, small amounts of money saved and invested early in your career can grow exponentially over the years than big amounts of money invested later in your life.
The truth is that only a few Americans can manage to set aside 15% of their earnings for retirement, but that shouldn’t discourage you. Investing smaller amounts consistently as part of your retirement planning strategy can yield much higher benefits than expected.
Let us analyze these two hypothetical scenarios: Person A starts saving and investing $100/month at 25. By the age of 65, this individual will have accumulated more than $640,000 in retirement savings assuming the annual return is 10%.
Meanwhile, person B waits until he is 35 to start saving for his retirement but invests $200/month. Assuming everything is constant, person B will have about $200,000 less in his retirement balance when he hits 65.
The two scenarios demonstrate how important it is to start investing as early as possible. Stop postponing your retirement planning and start acting now to achieve your goal.
The Bottom Line
The most important thing about retirement saving is to keep your eye on your retirement dreams. Do the best you can to ensure you save as much money as possible.
Sometimes, it may be hard to save more but what is critical is to get as close to your saving goal as possible and check your progress frequently to see if you are still on track.
At Senior America, we are here to help you every step of the way. Talk to us today to learn more about retirement savings and senior living.
