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.
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?