If you're wondering how much should you have in savings for when it’s time to retire, you’re not alone.
How much should you have in savings for retirement? This is a question as old as retirement itself. We all know we're supposed to be saving for retirement, but to most people, exactly how much money we're actually supposed to be saving is less clear.
One of the biggest obstacles to saving for retirement is dealing with outstanding debt, but in order to figure out a savings goal, you’ll also have to think about how you want to live your life when you finally decide to retire.
Do you want to travel the world? Move to the country? Or help get your grandchildren through school? The answers to all of these questions play a significant role in how much you’ll need to have set aside.
You must consider what your retirement goals are so that you're as prepared as possible when the time finally arrives. Here are some things to consider when calculating how much you should have in your savings.
A Good Rule of Thumb
Many financial planners will recommend that when your planning for your retirement, you should have 80% of your yearly income saved for retirement. So, for example, if your annual salary is $75,000, you’d want to be able to withdraw $60,000 per year -- and this number is a minimum. In fact, many people would argue even this is not enough.
It’s important to understand that this “80% rule” is based on three key assumptions:
- When you retire, you will not be paying any payroll taxes or making any pension or retirement contributions
- Your mortgage (if applicable) will be paid off by the time you retire. If you are still making mortgage payments, you must plan to have more than 80% of your income available to continue to shoulder this expense.
- Many recurring expenses you have during your working years will either be zero, or significantly less. For example, commuting (since you aren’t working), food (more time available to save money by cooking and shopping frugally), and clothing purchases.
Setting aside enough money to withdraw 80% of your working salary each year might all seem like a daunting task at first, but it’s an attainable goal assuming you start saving early.
Once you have a good idea of what these figures are, you can figure out how much you need to save. There are dozens and dozens of easy-to-use retirement calculators available online. You supply some basic info, like your desired age or retirement, current age, current income, and the amount of income you want to have at retirement.
The calculator will help you understand how much you should be saving each month to reach your retirement goals before you retire.
Stay on Track With Retirement Benchmarks
After you understand how much you need to have saved, you should try to yearly save enough money to meet your goals. The U.S. Department of Labor Savings Guide offers a very helpful Savings Fitness Guide, and Worksheet 4 (scroll to the end) will help you work out the specifics of saving for retirement. It is really helpful for estimating how much of your income you will have to save each year to meet your retirement goals. There are four steps that the worksheet takes you through:
- Estimate how much income you're going to need for the first year of your retirement.
- Determine how much in savings you'll need when you retire. This is the amount of money you're going to need throughout your retirement.
- Figure out the current worth of your savings at retirement. This number represents how much your current savings are going to grow by until the time that you retire.
- Determine your target savings rate. This is the amount of your salary that you have to save each year so that you can meet your goal for retirement.
Exercise Caution with Benchmarks for Retirement Savings
General benchmarks are based on your withdrawal rate or your expected replacement income. They offer a good starting point for figuring out if you're on the right track to save enough for retirement.
For a lot of people, these benchmarks show them how much they have saved and let them know they need to think about retirement more often.
With that said, it's worth pointing out that these benchmarks are just milestones and they are essentially moving targets. A good retirement plan is going to be unique and specific to your lifestyle and situation, and must be reviewed annually to account.
Because of this, you should run a more detailed retirement savings estimate and consider things like social security estimates, desired income based on your retirement goals, and potentially even using your home as a source of equity. Remember to consider other sources of income like rental income (if you own any investment property), part-time work (like side hustles or freelance work), investment accounts, and potential inheritance.
Retirement and Inflation
As if that isn’t enough, you must account for inflation – the fact that what you can buy for $1 today will not be the same in the figure. There's a reason why they call inflation the "silent tax". It's something that most people don't think about but it can affect us greatly when planning for retirement. You should always keep inflation in mind when you're making retirement plans,
As inflation continues to rise, the value of a dollar shrinks. So $100,000 that you have today will be worth a lot less in a few decades as inflation continues to increase.
While the amount that you receive in Social Security will automatically be adjusted for cost of living increases, your retirement savings will likely not automatically take inflation into account. By having exposure to real estate, stocks, and commodities you can better hedge against the effects of inflation.
You can even get involved in certain investments that directly take inflation into account.