For years financial advisors have been recommending that people get in the habit of saving 10% of their salaries each year. If only for its simplicity (and easy math), this strategy has become the prevailing wisdom. But blindly putting away 10% of you salary may not always be the best course of action. What percentage of your salary you should save each year depends on a number of factors only you can determine.
Calculating how much money you will need to save for retirement requires taking into account a number of factors, including when you plan on retiring and what type of lifestyle you expect to live in retirement. Additionally, you have to factor in what your expected rate of return on your investments will be, how much your salary will increase each year, and how inflation will diminish your buying power. The Retirement Planner from BankingMyWay.com can help you crunch the numbers.
But you can’t always control the rate of return you see on your investment, and you have no say in what the inflation rate is. When you choose to retire and how you choose to live in retirement, however, is mostly up to you. If you choose to retire early at 55, you’ll need a lot more saved up than if you retire at 65 or 70. By the same turn, if you set up your finances to live on only 50% of your income each year in retirement, you won’t need as large a nest egg as if you live on 80%. Once you (and your spouse) make these decisions, you can work backwards to determine what percentage of your salary you need to save between now and retirement to meet your savings goal.
For example, say you and your spouse have a household income of $100,000. You expect your salary to increase 4% each year and expect an 8% rate of return before retirement, a 6% rate of return after retirement and an inflation rate of 3%. You plan on retiring in 35 years and have yet to accumulate any savings. If you chose a modest lifestyle in retirement in which you live off of 50% of your income, saving 8% of your salary from now onward will fully fund your retirement with over $1 million to spare. If you choose a more comfortable lifestyle during retirement requiring 75% of your retirement income, saving only 8% of your salary each year would result in your retirement savings running out 13 years into retirement. You would have to save about 16% of your salary for the next 35 years to accumulate enough money for your retirement savings to survive you. Adjust the numbers in the Retirement Calculator to see how much you need to save to live the life you imagine in retirement.
When determining your total monthly contribution to savings, you have to consider that not all of your savings goes toward your retirement. At the very least, you also need to save for an emergency fund that can cover a minimum of three to six months worth of your expenses. On top of that, you may want to save for a down payment, a new car, that trip to Thailand you’ve always wanted to take in addition to other large expenditures. When calculating how much of your salary should go toward savings, you have to include all of your savings goals.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.