How Much Should I Be Saving For My Retirement?
From experience, most of us have little idea how much we need to save for life’s longest vacation, and therefore most of us are grossly under saving. According to a recent study, in the US, only 36 per cent of Americans, who are 55 years of age or older, have $10,000 or more put aside for retirement. Unfortunately, in that case, this means that a large majority of baby boomers may never be able to retire.
There are a number of rules of thumb to follow to determine how much you need to save annually to reach your goal. Some rules focus on a percentage of your income you need to put aside, for example, 10 to 15 per cent. Other rules try to estimate what you need at retirement, and work backwards to determine an annual contribution. Fidelity recommends that one would need at least eight times their final salary to be able to fund 25 years of retirement. So if you estimate your final salary to be in the area of $150,000, you would need a lump sum of $1,200,000.
Another rule we often see is the four per cent rule. The four per cent rule guides how much you should withdraw annually once you're retired. As the name implies, this rule of thumb says you should withdraw four per cent of your retirement portfolio the first year, and then in the subsequent years the same amount adjusted for inflation. So, if you estimate you would need to spend $80,000, adjusted for inflation, in the first year of retirement you would need a lump sum in the area of $2,000,000 ($80,000 divided by four per cent). If you are 35 years of age and are just starting to put money aside for this need, you should save around $1,800 per month using a six and a half per cent annual rate of return.
As with any rule of thumb, it won’t be precise for your situation, but it is a starting point. As everyone’s situation is different, you will need to do some legwork to figure out your particular needs and lifestyle you desire to have at retirement. But you must be realistic when you picture yourself retiring. What are the items that make your retirement ideal? Do see yourself traveling the world? Are you planning to live overseas? Do you enjoy drinking fine wine and playing a regular game of golf? Even more importantly, will you be eligible for your country’s healthcare benefits? Healthcare is by far the largest retirement cost and without national healthcare benefits, your savings can quickly disappear if you need a major procedure.
Even if you put a lot of thought and planning into how much you need for retirement, it is more than likely that something unexpected will happen between now and when you plan to retire. There may be a major downturn in the economy, your children may need to move back home or perhaps you or your spouse will have health issues later in life that will prevent you from saving. You should take time to calculate how much you need to start saving. The more you save now, the better you will be able to weather the unexpected later in life.
Bill Longstreet is a partner with Caterer Goodman Partners, a primarily fee based financial advisory firm. For more tips on how to handle your savings, check out their blog: www.chinaexpatmoney.com