How much money do you need to save to be able to retire? As you probably already know, this simple question isn’t so simple to answer.
That said, figuring it out isn’t impossible — it just takes a bit of time and thinking. The easiest way to tackle the task is to sit down with a financial planner. A good one will be able to calculate a savings goal and can help you come up with a plan to get you there.
If you prefer to do it on your own, or if you just want a ballpark number right now before going to an advisor, this article by Financial Finesse is a great starting point. Another place to begin is with a retirement calculator. Our favorite is this tool from Smart Money, though there are plenty of others others online. With a few simple inputs you’ll be able to see how much you’ll have saved at retirement and whether that number is enough.
However, before you use a calculator or sit down with an advisor, you’re going to have to ask yourself these three basic questions:
When Do I Want to Retire?
Some financial firms use a simple rule of thumb to calculate how much money you’ll have to save to be able to retire. Basically, they estimate that you’ll need to save 8 to 14 times your annual salary.
Why does that number vary? In part because different companies use different accounting models. But also in large part because it depends on when you want to retire. Someone who wants to retire earlier, say at 62, will need much more savings than someone who wants to retire at 67.
It’s pretty amazing what a difference those few years make. Retiring later allows you to save more, earn more interest, and potentially collect larger Social Security checks later. So sit down and spend some time thinking hard about when you really want to retire. If you enjoy your job then perhaps put off retiring for a few years — it’ll have a major payoff. Or, if you want to retire early then be aware that you may have to live on a lower budget.
How Much Do I Plan on Spending in Retirement?
Speaking of budgets … above we mentioned that some planners use a simple formula based on your annual salary to calculate your retirement savings goals. This may be a good starting point, but it also only gives you a rough picture of what you’ll need. Why? Because it doesn’t take into account the fact that some people spend more in retirement and others spend less.
A key part of figuring out how much savings you’ll need is determining how much you’ll be spending in retirement. So sit down and think about what your retirement will look like. Do you want to take up an expensive hobby, travel around the world or trade-up to a higher-end neighborhood? Then make sure to budget more for that. Or will you have paid off your home at retirement and don’t plan to move? If so, you may be able to get by on less than you’re currently spending.
Of course, it’s almost impossible to create a complete retirement budget right now, but do your best to figure out a ballpark number. One piece of advice: estimate a bit higher rather than a bit lower. Often people think they’ll be able to cut expenses in retirement more than they actually are able to.
How Much Do I Have Saved? What Other Income Will I Have in Retirement?
Any advisor or retirement calculator is going to ask you for a full picture of what you’ve got saved and what you realistically believe you can save in the future. So, go back through your shoebox of statements (or online account overviews) and try to figure out exactly how much you’ve got squirreled away. Also, take a look at your current budget (or make one if you don’t have one) to see how much you’re saving each month and whether you can realistically increase that number in the future.
Finally, if you work for a company/organization that has a pension plan, schedule some time with an HR representative to understand exactly how much you can expect to receive when you retire.
Photo by Damian Gadal via Flickr.