Experts recommend saving 10% to 15% of your income every year, but in four simple steps, you can calculate a more personalised goal.
It is the issue of a million dollars, literally. How much should I save for retirement?
As a rule of thumb, most analysts propose a 10% to 15% annual retirement savings target for your pre-tax income. High earners generally want to hit the top of that range, while low earners typically can hover closer to the bottom because more of their income will usually be replaced by Social Security.
Yet, rules of thumb are just that, and how much you can save for retirement will depend heavily on your future, both the known and the unknown pieces, like:
Four guidelines to find out how best to invest for retirement are available here:
Estimate future revenue demands
Fair warning: Most work is involved in this step, but power through, because the others are a breeze. And if you keep the budget even loose, you have gotten a leg up. Projecting future tax needs to start with a peek at existing spending.
In the first column of a spreadsheet, enter your typical monthly expenses or jot them on a piece of paper. Then think a little about whether each expense will remain the same, go down, go up or – the best of all – disappear in retirement (we are looking at you in a perfect world, mortgage). In a second column, write down your best guess of what each retirement expense will be.
Add those up, address those items you do not pay for now but intend to spend money on later — leisure, tennis, mahjong equipment and dance lessons in the ballroom — and you will get a good picture of your future monthly spending plans. Multiply by 12 to get the money you will need each year to finance the tax expenses. Compare this with your existing salary and what is called a loss level or how much of your money you will be looking and offset after retirement.
Consider the basic rules of thumb
More than half of the employees have attempted to measure how much money they need to retire, according to the employment trust study performed by the Employee Benefit Research Institute. That means you will not complete at least 50% of the exercise outlined in phase one (if you have completed step one and have a ratio of 70% to 90%, please, you can probably skip step three).
When you are among the 50% who would not do the test, that is the reason to fall back on thumb principles for revenue replacement. These are not as reliable as they are, since they are a one-size-fits-all approach to a problem that comes in several forms and lengths. Yet, much more than nothing, they are.
The one most commonly used is the 80% rule, which says you should aim to replace 80% of your earnings on pre-retirement. It is a vague rule – some people recommend skewing to 70%, some say it is best to strive for a more conservative 90%.
Ask what proportion of your salary you are saving for savings and find out when you are heading. You will not have to do that again until you cross the imaginary finish line, which means you can comfortably survive on 85% of your salary without changing your spending if you are saving 15% today.
The best way to follow a thumb rule like that is to test your instincts against the more tailor-made method of taking a deep dive into your expenses. Are you breaking away from the traditional recommendations or fairly close? It can also be used as its starting point, where you can wiggle the numbers from.
Calculate your retirement
If your calculations are right, a decent retirement calculator will give you an indication of where you are in the development of your investments by comparing these forecasts of annual spending with predictions. Many detailed calculators bake in research-based assumptions: errors on estimates of inflation, life expectancy and stock returns will occur.
To get the most reliable answer, you can decide that these assumptions are right considering your situation. Is your investing plan capable of meeting a calculator's average return, which is likely to hover about 6% or 7%? If you lean against shares, you will want to change it downwards. Did your father and sister survive to 110? You have nice genes, but they are pricey. You need to take into account the extra years you can live in your predictions.
Regular checks
Circumstances are changing, and with them, the insurance requirements must change. It makes sense to run these retirement estimates relatively frequently, whether it is a new career, a new baby, or a new desire to wander the globe until you reach the age of 65. It is just easier to adapt when you go, rather than struggling down the track to keep up.
If you feel overwhelmed, having your financial goals balanced will help you. Choices vary from low-fee electronic robo-advisors to a variety of services provided by financial advisors. You should read more on having a financial adviser that is perfect for you.