Economists have been sounding alarm bells about the precarity of social security and pension plans for years now. The uncertainty surrounding old-age payouts is part of the reason financial planners tend to stress the importance of saving for retirement. But how much is enough? And even more importantly, how can you reach your savings goals without upending your regular budget? It’s difficult to strike a balance between budgeting for the present while also saving enough for your future. But with some careful planning and disciplined saving, it can be accomplished. How much money do you need to retire? Let’s break this down.
11. General Rules of Thumb
Financial planning experts often cite two common rules of thumb. One offers a ballpark figure of how much money you will need to live out your life in comfort. The other provides a general blueprint for step-by-step saving to reach specific goals.
To figure out how much money you’ll need to maintain a comfortable retirement, look at your pre-retirement (and pre-tax) annual income. The rule of thumb is that you will need to generate 80% to 85% of that total to maintain your current lifestyle. Thus, your personal savings will need to bridge the gap between that figure and whatever amount you expect to receive from a pension or social security.
To keep the numbers easy, let’s say you make $100,000 a year. When you retire, you calculate that you’ll be entitled to $40,000 a year in pension and/or social security benefits. That means you’ll need about $85,000 a year to maintain your current lifestyle. According to this rule of thumb, you’ll need to come up with $45,000 a year on top of your retirement benefits. Assuming you’ll retire at 65 and life to the ripe old age of 95, your nest egg will need to be roughly $1.35 million to see it out.
The other rule of thumb says you should stash away 10% to 15% of your annual pre-tax income for your retirement plan. If you stick to your plan and never miss making a scheduled contribution, the magic of compound interest will make the numbers work. You just have to start saving as early as possible.