Figuring out exactly how much to save for retirement has too many moving parts to make it an easy thing to figure out.
Well it does not have to be too hard. By breaking yourself into one of two groups, you will have an easier way to determine what you need to be saving.
Those to groups are easy to put yourself into. Either over 10 years from retirement or less than 10 years from retirement.
Would you plan every last detail of a vacation 10 years down the road?
You don’t know where you will be living, how many people are going with you or if the airlines you book will even be in business.
Look at retirement planning the same way. If you set a specific savings target for retirement when you are twenty-five it will be wrong by the time you are thirty-five.
Your lifestyle will change, your relationships will change, and your health will change. All these variable will change your specific retirement numbers.
What’s the real story?
You have two choices.
Is your retirement is less than 10 years away?
Now is when you can start to figure out exactly how much to save for retirement. No more generalizations.
First you need to figure out how much money you will need.
Most advice you get will tell you to simply take a percentage of your current income.
But there is a problem with this.
A generic percentage might not be exactly what you need. If you calculate based on 70% of your income but you actually spend 90%, you will under save.
Instead you should calculate how much you need to live each year by looking at your current expenses.
Simply add or subtract for what expenses will go away with not working. Then add in any new costs that you will incur during retirement.
For example you won’t need as much dry cleaning, but your golf costs will go up.
Doing this might take extra time but it will give you a better picture of exactly what you need to have in retirement.
Second you need to determine how much money you would have coming in if you retired today.
To do this add the following together:
To arrive at what your monthly income from current investments would be you can do it one of two ways.
Third calculate what the difference is between steps one and two.
Subtract your expenses from your income and this will let you know what your monthly shortage will be.
Fourth, multiply the shortage by twelve to get your estimated yearly shortage.
Fifth, you need to decide how many years you are going to be in retirement.
Obviously most of us do not know when we are going to die, but it would be fair to say that we can make an educated guess.
Did all of your parents and grandparents die in their 70’s? Then you could reasonably assume you need to plan for living at least till 80.
Sixth, multiply your results from the forth step with the number of years you decided in the fifth step. This is what your shortfall for all retirement is estimated to be.
Seventh, find a financial calculator to determine how much you need to save per month to close this gap before you retire.
At this point you will also take into account inflation and return on investments. General guidelines recommend 3 % for inflation and 7 – 10% for return. What you decide ultimately depends on your risk tolerance.
You could even figure out multiple options so that you have a best case and a worst case scenario.
This will give you how much you should be saving for retirement.
Now you are on your way to saving for retirement without having to manage too many moving parts.
(Ladies, you might need some minor adjustments, so check out this article on Women and Retirement Planning)