How Much Do I Need to Save for Retirement?

While many people prioritize the need to save for retirement, they don’t always have an idea of their “magic number”— the amount of money needed for a successful transition from the working world to the retirement world. In fact, most people don’t.

Only one in 10 Americans understands the level of savings needed to retire and live in a fashion similar to their current standard, and only 14 percent of Americans are confident they’ll have enough to live on when they retire.

A big savings hurdle for some is outstanding debt. If you have more debt than you can pay off, complete our form to get help reducing your debts quickly.

In addition, consider other goals you want to achieve when you retire. Do you want to travel Europe once a year? Buy a little vacation house on the beach in Malibu? Fund your grandchild’s college education? Give your grandkids and great-grandkids a monthly stipend? If so, you need to consider the costs of each goal and build that into your savings goal.

So where do you stand? How much money would you realistically need to be able to retire and live comfortably for the rest of your life? And how much would you need to save each month? It depends largely on the lifestyle you’d like to lead in your senior years.

Retirement Savings Rule of Thumb

A generally accepted rule of thumb for retirement planning is that you should have, at minimum, 80 percent of the yearly salary you earned while working. This is sometimes called “replacement income.” So if you made $50,000 a year while employed, you should have at least $40,000 per year available to spend during retirement.

That’s the start. Multiply that figure by the average life expectancy post-retirement to determine the total minimum amount you need. Anything above that and you’re generally in good territory.

How Much Should I Save Each Month?

Once you know your goal, it’s time to figure out the amount to put away each month. Retirement calculators abound online, but the one offered by MSN Money is very straightforward. Enter your variables, including current age, desired retirement age, current income and the amount of income you wish to replace at retirement.

For instance, let’s say that you’re 30 years old, want to retire at age 65 and expect to live at least 25 years after retirement (age 90).

You make $50,000 per year and would feel comfortable with 80 percent of your pre-retirement income. Assuming a return on your investments of 6 percent —a fairly conservative rate — and a 3 percent inflation rate over time, you’ll need to save $1,437 per month to meet your goal.

This will put you on the right track, but you should consider other potential sources of income as well as any debt obligations.

Social Security Income and Pensions

Social Security benefits are a major part of most people’s retirement income and can help reduce the amount of money people need to save for the future. By law, money is deducted from each of your paychecks to fund the Social Security system.

Your benefits under Social Security will vary according to your income over your working years. In 2010 the average monthly payout for retired workers was just $1,176, according to U.S. News and World Report. This means people cannot depend on Social Security alone to provide them with a comfortable retirement. You can estimate your future Social Security benefits at the Social Security Retirement Estimator.

At the same time, the system also faces some financial challenges. The Social Security trust fund, which has been collecting money for several decades to prepare for a surge of retirees, is expected to run out in 2036.

By then, payroll taxes and other income will raise only enough money to cover 77 percent of program costs, unless the government considers tax increases, benefit cuts or other changes to the program. While Social Security is unlikely to disappear, taking aggressive steps to save money in other retirement vehicles is a wise move to decrease your dependence on Social Security and enhance your peace of mind.

Pensions are another potential source of retirement income for some workers in business and government. These plans often require you and your employer to contribute money to a fund during your working years so you can receive a fixed amount each month upon retirement.

Like Social Security, the guaranteed annual income from these plans will affect the amount of yearly replacement income you’ll need in retirement and can reduce the amount you’ll need to save each month to hit your target.

Retirement Issues to Consider: Credit Card Debt and Mortgage

You’ll also need to consider how you’ll take care of your financial obligations after you stop working. For instance, if you own your home and plan to live in it for the rest of your life, one goal may be to pay off your house note in one lump sum so that you won’t have to continue to make a regular mortgage payment.

If you plan to carry credit cards and have one or more loans during retirement, ideally your savings should cover those balances as well. That way, you can avoid paying expensive interest payments for the rest of your life.

Retirement and Inflation

When deciding how much you need to save for retirement, keep inflation in mind. Inflation is the rate at which prices rise over time. The higher inflation rises, the less your dollar stretches. So $500,000 today will probably be worth much less 20 years from now as inflation increases.

The amount of your Social Security payments during retirement are automatically adjusted for cost of living increases, but your retirement savings remain flat unless you’re in a special type of fund.

Certified financial planner Lyle Benson of L.K. Benson and Company advises that you diversify your retirement savings into funds that keep pace with inflation rates but remain conservative. “Have some exposure to commodities, stocks, and real estate, but don’t go overboard,” Benson says.

Other ways to protect yourself from price increases include investing in certain inflation-adjusted annuities offered by insurance companies, paying off your mortgage and just remaining frugal overall. Consult with a financial planner about your specific situation to determine the best course of action.

Setbacks

If your coffers are depleted because of a financial emergency or you just haven’t been consistent with a savings plan, it’s never too late to get back on track. But it is time to be more aggressive in your saving.

Revise your budget to cut expenses so that you have more to put toward your retirement fund. Maximize your contributions at work, and take advantage of any matching funds offered by your employer.

Boston College’s Center for Retirement Research estimates that a “medium earner” making about $43,000 a year who starts saving for retirement at age 35 (which is considered late) can save 18 percent per year and still retire with enough savings by age 68 to live a fairly comfortable lifestyle.

Bill Fay

Author

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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