Over the past few weeks I've been noticing quite a few searches coming to this site with people putting together their financial strategy for the new year, and asking one important question. How much annual pay should I be saving for retirement? It seems like a lot of folks are just unsure about how much they should be saving, and they're worried that they won't have enough, especially given the current economic climate, and debts they may be trying to pay off first.
Today I thought I'd do an examination of this question, and talk about what some of the different thinking on the topic is.
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How Much Should I Save For Retirement?
There are several viewpoints that people can come from when trying to figure out how much to save for retirement. Their calculations all seem to take into account different assumptions and criteria, so it's important to look at them all, and figure out which you think would work best for your situation.
Some of the criteria that may be important when calculating how much you'll need include how long you expect to live, the costs of health care in the future, how much inflation we'll see and what type of lifestyle you're living. Also important are your age, your current income, how much you've already saved, your employment prospects in the future and how much you're willing to sacrifice now for future security.
With that said, here are some differing viewpoints on how to determine what you should be saving for retirement.
Save A Set Percentage. Save 10-20% For Retirement
Most retirement calculators will use people's current pre-retirement income as a frame of reference when calculating how much the person should save for retirement. A lot of financial planners will say that most people will need anywhere from 70-100% of their income in retirement in order to be able to live a similar lifestyle when they retire. To do that most of them will suggest that people save anywhere from 10-20% of their income. While I think that it can be a decent rule of thumb to save that much, in some cases it may not be adequate – or in some it may lead to saving more than you need.
Save As Much As You Can
Another viewpoint that I've seen quite often are the folks that just say to save as much as you can. Some months that may mean saving just a little, other months it may mean up to 1/2 or 3/4 of their income. Basically they feel that there is no such thing as “too much savings”. They feel that if they can just save as much as possible every month, they'll be fine when it comes to retire. While this may serve some folks well, it may be a bit too simplistic for a lot of people. It may lead to saving more than you need, requiring more sacrifice than is necessary. It could also lead to saving too little if the “saving as much as you can” is only a little bit of money at the end of the month after all other bills and even entertainment costs are paid.
Save What You'll Need
Some people believe that saving for retirement is an extremely personal thing, and you should really put together a personalized retirement package based on your own expectations and personal situation. For example, they'll factor in things like their current income and age, amount of money the have already saved, their employment outlook, how long they expect to live when they retire, and what type of lifestyle they'd like to live in retirement. They also factor in things that may be changing when they retire like downsized housing costs, reduced auto expenses, and increased travel and entertainment expenses. In other words they take a comprehensive look at what their current situation is, what they hope to do in retirement, and then they make a plan based off of what their ideal situation would be, and how much they will need.
Retirement Planning Is Very Personal
I think that retirement planning is a very personal process, and one that all families should undertake. When looking at the viewpoints above I think I come down closest to the “save what you'll need” camp, where you figure out your personal situation, factor in your personal needs and desires, and then come up with a number based off of those. Once you come up with a number – add 10% to it, better to have too much saved than too little.
While I understand that getting into the nitty gritty details is probably the best idea, I know not everyone will take the time to do that. If you don't go through with it, at least stick to the old 10-20% rule, and start saving for your retirement as early as you can!
List Of Retirement Calculators
Here is a list of retirement calculators I found via getrichslowly.org. The ones on this list take into account more criteria than just income, and will probably give you a better picture of what you need to save.
- T. Rowe Price: Retirement income calculator
- The Motley Fool: Am I saving enough? What can I change? (calculator)
- Bankrate: Retirement income calculator
- Moneychimp: Simple retirement calculator
- Scottrade: Retirement calculator
Have you figured out what your retirement savings number is, and how much are you saving towards that number today? How did you determine your goal? Do you think you'll reach it?
I think what makes it difficult for some people is you have to rely on averages. How long you will live? Can you outlive your retirement money? Who knows how much inflation will affect your savings? We have to rely on averages, because we can not predict the future too accurately. One thing for sure, you need to save for retirement.
I believe in the personal approach as well. If we’re going to live in retirement for several decades then it behooves us to at least take a couple of hours to personalize it. Our recent posts on our blog about retirement savings may help.
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Derrik Hubbard, CFP
I’m aiming to save 50% of net income this year, not just for retirement but also for getting out of the rat race (well, they’re the same thing really?) and achieving financial independence. If I can live on that then hitting my long-run goals will be much more achievable.
Good luck with the goal! I know a lot of people would have a hard time reaching that, but if you’re able, more power to you!
Retirement planning is definitely a personal process. I’m in favor of working the best plan out for yourself. This will at least force people to think about their needs and existing resources. However, I strongly recommened people having their plan reviewed by a trained professional, either CFP, NAPFA. Their recommendations may endorese your plan, or identify better ways to approach things. Either way, you will probably learn something new, and it could save you from a miserable retirement.
I dislike the “save as much as you can” approach because it’s the approach I used to take … before I realized I was sacrificing joy in the now, for the sake of a future. It’s not a balanced approach.
I do like the idea of assessing what you’ll need, but bear in mind that your needs might change … unexpected expenses can come up (huge and urgent home repairs, or a medical crisis that insurance won’t cover — either for yourself or for a family member). You just can’t know what you’ll need or want, and you don’t know how long you’ll live.
I think the “save as much as you can” can include allowances for “the as much as you can” being after you’ve used some fun money. :) It’s all in the budget!
I like the idea of “save as much as you can” and I try to follow that rule. I vary the amounts I place in my 401k account and my savings account and make adjustments 2-3 times per year depending on what my budget allows.
One thing that retirement calculators don’t include what the value of assets one might receive through inheritance and how those assets will be handled either those assets will be sold and the funds invested or the assets be kept and the income from those assets are used to suppliment your retirement.
If an individual is in the $7.25 to $15.00 per hour pay range, contributing 4 to 6 % of gross pay to his/her 401(k) account is about all he/she can afford. If the employer contributes 4%, then the individaul has at least 8% of gross pay being Invested in his/her 401(k) account every payday which is good for this income situation.