Photograph Courtesy Of Tax Credits
One of the most difficult financial questions to answer is how much you should be saving to have a comfortable retirement. This is because there are many factors in your life that could change between now and the time that you retire and these factors could dramatically increase or decrease the amount you will need to live comfortably. Fortunately, there is a simple technique that you can use to determine the amount of money that you will need to save for retirement if you were to start saving today. Here are the steps you can take to calculate how much you should be saving for retirement.
Calculate 80% Of Your Current Salary
The first step in calculating how much you should be saving for retirement is determining the amount of money you will need each year to maintain your current lifestyle. For most people, this will be around 80% of their current income because work related expenses would no longer be needed. So, if you make $40,000 a year now, the number you should start with is $32,000.
Compensate For Inflation
Long-term inflation will have an effect on the amount that you need for retirement because inflation nearly guarantees that everything will cost more when you do decide to retire. To compensate for inflation in your calculation, you should add 3% per year for each year you have left until retirement. If you plan on retiring in 18 years, the calculation (using Google’s search bar) would be 1.03^18 which equals 1.7024. Multiply this number by your first number ($32,000) to get the amount that you will need to maintain the same lifestyle each year after retirement ($54,477).
Subtract Your Social Security Payments
Now that you have a rough estimate of the amount of money it would take to maintain your lifestyle in retirement, you can subtract any regular payments that you expect to receive in retirement from the total to figure out the amount that you will need to come up with each year. For most people, social security payments will be the bulk of the additional payments that they will receive during their retirement years, but these payments may also include pension payments and annuity payments. For a person who expects to receive $15,000 annually in social security benefits during their retirement years, only an additional $39,477 is needed each year to continue your current lifestyle.
Multiply this number by 20 (the average number of years a person lives after retiring) and you will know the amount that you will need to have saved by the time you retire to ensure a secure retirement.
Join our newsletter
Subscribe to get the latest "Engineer Your Finances" content via email.