October 8, 2020
By Rahul Iyer
You’ll need at least $1 million saved for retirement, give or take. It’s the give or take that really throws people for a loop. $1 million isn’t enough for some people and is too much for others. So how do you know how much to save for retirement?
Ask yourself the following questions.
It may seem hard to think of what expenses you’ll have 20 or 30 years from now, but it’s important.
Make a list of your expenses now and think about which expenses you’ll still have in retirement. For example, think about your mortgage. What’s the term? Will you retire while you still have it or will it be paid off before you retire?
Think of other large expenses, like car payments and credit card debt. Will you still have children living at home? Will you be living in the same home? Write down the taxes and insurance, because you’ll always have those costs.
Use this number to figure out how much money you should save for retirement.
You shouldn’t rely on one income source for retirement. Think about where else you’ll get money.
Do you have any of the following:
Social Security income
Other retirement savings
Once you know the total of your other income sources, you have a better idea of what you need to save. For example, if you estimate your expenses to be $3,000 and you’ll bring in $1,500 from your other sources, you’ll need $1,500 per month from your retirement savings.
Once you have your numbers, put it all together. Compare your annual expenses to what you’ll bring in from other sources.
Then think about how much you need. A great general rule of thumb is to calculate 80% of your current annual income and multiply it by the number of years in retirement. The later you retire, the fewer years you must cover.
It’s not a perfect science and it requires some tweaking. If 80% of your annual income seems like too much or too little, adjust. If the number you come up with after looking at your expenses seems to low, adjust.
The key is to continually revisit your numbers. Life changes quickly – so what may be right this year may be completely different next year. Maybe you’ll have more or less expenses, maybe you changed your mind on how and where you want to retire.
It’s a slippery slope, but if you keep at it, you’ll have enough money for retirement – just don’t give up. Make adjustments as needed, put as much away as you can, and always make sure you meet your employer’s match on your 401K because otherwise it’s like giving away free money. Let the earnings compound and the money grow as you get closer to retirement.