Retiring on time and with enough savings to live well is a truly important life goal. But how much is enough saving to retire?
The number you hear bandied about on personal finance sites is 15%. Let’s first consider what happens if you pick that number.
The good part about a percentage rather than dollars is that it’s a scalable figure. If you earn more, you save more. That’s because you probably also spend more.
Assume you make $50,000. Fifteen percent of that is $7,500. Taken from a biweekly check that’s just about $288 saved every pay period.
If you put the money into a 401(k) or IRA you’ll save on taxes, but for simplicity’s sake assume that the $7,500 you save is invested straight into a typical retirement portfolio.
Compounding at market rates over 30 years you should expect your portfolio to grow to $758,000 and some change. Once you retire, that money is then invested in an income-producing portfolio.
The government estimates (very broadly) that such a person retiring at 67 would get about $1,500 a month from Social Security. A $50,000 paycheck divided by 12 months comes to $4,167 a month.
If you subtract the Social Security income, that’s a shortfall of $2,666 you need to come up with from investments. A portfolio worth $758,000 with a withdrawal rate of 4% would produce $2,527, just a few dollars shy of the goal.
It’s possible you will spend less in retirement, if you have a paid-up mortgage. Health costs will be higher, too, of course. The better way to think about retirement savings, then, is to work backward from the dollars you think you’ll need.
This is really a budget exercise. Can you live on around $4,000 a month? Is perhaps $7,000 a more reasonable estimate, considering travel, hobbies, healthcare and grandkids?
If so, then first subtract you Social Security estimate from the real number you need. You end up with $5,500 a month of income needs. Working backwards, you should be saving not $7,500 per year but closer to $17,000.
The monthly savings takeout from your check would be $1,416. Perhaps that’s more than you can sustain on a $50,000 a year income, but those are the real numbers. Plus it’s a savings rate of 34%, not 15%!
Either you need a second job, a working spouse or to much more strict budget to make the plan work. The good news is, under current regulations, you can save up to $18,000 a year in a 401(k) and pay no taxes on that income.
It turns out the government knows what it takes to retire well. That’s why the maximum figure is so high. How you get there, however, is your problem.
Begin by budgeting and by all means, save as much as you can, as soon as you can into tax-deferred accounts such as a 401(k) or IRA. You’ll thank yourself later.
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