It helps to have a target in mind when saving for retirement, and this article will help you calculate your individual target.
The Top Line
- When thinking about saving for retirement, it’s important to have a goal in mind.
- Factors to consider when setting your goal including your expenses in retirement, future expected earnings, your desired lifestyle, your geographic location, and the age at which you would like to retire.
- A rule of thumb is to save 25 times your annual income but this number should be adjusted based on your individual circumstances.
If you are like millions of Americans who are trying to get more information about saving for retirement and what they will need to accomplish if they have the hope of retiring on-time, then you may be scrambling to try to find out what the optimal amount is to save for retirement. While it would be easy to say that the optimal amount is the same for everyone that is saving for retirement, that just isn’t true. The truth is that the optimal savings for retirement is going to vary for each person, since every person is in a unique situation with their own goals, resources, tools, and challenges.
However, we don’t want you to feel overwhelmed about trying to come up with a number to save for retirement. We’re going to provide you with some basic guidelines as well as some information that you can reference if you want to save the right amount for retirement and ensure that you have enough of a cushion to feel comfortable retiring at the age that you would like to retire at and with the lifestyle that you would like to live. Here is the information that you need to know.
Factors in Determining the Right Amount
The first thing that you should know about determining a number to save for retirement is that there are a wide number of factors that will go into determining what the right amount is for you. The answer simply isn’t the same for everyone, and it will depend largely on the following factors to determine how much to save for retirement and what you will need to plan for while you are doing it.
Costs in Retirement
The first major factor is what you think your costs are going to be in retirement. These are not always easy to know since your life could be completely different between now and then. You may or may not have a mortgage, and that alone has a huge impact on how much you will need to save. Before you make a plan for a goal to save for, you should think about what your ideal retired life and what expenses you want to or have to carry into retirement. You may consider downsizing your house or maintaining your current standard of living. Either way, you will need to think about what your costs will be on a monthly basis during retirement and this knowledge will help you create a total savings goal that you can adhere to. In addition, medical costs and health insurance are a large expense during retirement. A general rule of thumb is that you will need 80 percent of your final annual income each year. So if your final income before retirement is $100,000, you would want to have $80,000 in retirement income each year.
While you may not be earning much right now, you will most likely earn more in the future. Many people haven’t yet earned their full earnings potential and are not in the late stages of their career. One factor that is going to play a large part in how much you save and how long it takes is your expected earnings. While this won’t matter for how much you actually need, it will help to determine when you can retire and what your standard of living is going to be. Make sure that when you draw up your retirement plan, you try to plan for any potential salary increases that come up, along with any increase in cost of living that you anticipate.
Part of determining the optimal amount to save for retirement is coming to grips with what kind of standard of living that you want to have when you retire. If you want to travel the world and buy luxury gifts for your family members, you are obviously going to need a lot more when you retire. However, if you want to keep a frugal lifestyle and you don’t plan on traveling that much, then you can justify saving a bit less. Whatever you decide, you should make sure that your savings goals correspond to how much you would like to be able to spend and what you want your retired life to look like.
A huge factor that will play a large part in determining how much you will need to save is what your future goals are with regards to housing, children, and the education of your children. If you are going to retire early and want to pay for your children’s education, this is obviously going to play a large part in increasing the amount that you will need to save. You should plan ahead for any expenses that are going to come up such as purchasing new cars, moving homes, and helping out any children with expenses related to education. You’ll also want to plan for if you have goals to move outside of the country or to a new location.
Region of Residence
Where you live will play a large part in determining how much you will need to spend on a yearly basis. High cost of living areas such as California will contrast sharply to low cost of living areas such as the midwest. You should consider where in the world you want to retire and the average cost of living there as opposed to just taking into account your current living situation and cost of living.
Age of Retirement
Do you want to retire early? If so, this can make a large difference in how much you are going to need to save. Those who retire early will need to save more since they have more years of retirement to cover, as opposed to those that retire later and don’t have as much time to cover financially. Whether you decide to retire late, early, or in the middle, you should make sure that you factor that decision into your goal for savings.
A Good Rule of Thumb
All in all, there is a blanket rule of thumb that is useful for those that need an amount goal. For most people, 25 times their annual expenses is a great number to save. This should cover you for the foreseeable future while also allowing your portfolio to grow at a rate that covers your annual expenses plus a bit more. Once you figure out what you can expect to spend in retirement, you can save to that number multiplied by 25 to make it as easy as possible. This obviously varies according to the factors described above, but is a good rule of thumb for most people and a good starting point. If you think that you will travel more, want to pay for your children’s education, or want to retire early, then you should adjust your number upward. If you plan to relocate to a less expensive area or plan to work part-time during retirement, then you should adjust the number down.