How much to save for retirement?

watch the video https://youtu.be/B8LF3MgU4m0

Do you know how much you need to save for retirement?

I was recently talking to a family member, she told me that she is excited to have started to save. As a recent graduate, she knows the importance of saving. However, she stopped herself as she was talking and told me that although she is saving money, she doesn't know what she is saving for? She's been told all her life that she needs to save, but why and how much should she be saving?

There are several reasons to set aside money. The first money to set aside is for emergencies. The emergency fund is an important part of your financial security. How much and where to save this money is discussed in another video. Today, I want to talk about how much money you want to save for retirement.

Why save for retirement?

The more you have saved the more you can enjoy your retirement, or the earlier you can retire. For most people, not having to work is a goal they are striving for. So the more money you can save, the less you have to work. We are seeing an increased interest in retiring early, movements like the FIRE movement, that encourage people to be financially independent, and to retire early. While this sounds interesting. My discussion is geared more towards the traditional retirement approach. Which is start working in your 20’s and retire at the age of 67.

According to the CDC, the life expectancy in the U.S is around 79 years of age. This means that on average people have to save money to last them 12 years!

How much to save?

How much you will need to save will be a function of how much money you want to spend during your retirement years.

Think about the lifestyle you want to live and your expected life expectancy.

For simplicity, let us consider that you want to keep things the same, meaning that you want to maintain your current lifestyle at retirement. Then, you will need to save enough money for retirement so that you can replace 70-80% of your current income. According to the U.S Census, the median household income is 68,000 dollars. Let us assume that the median individual income is $68,000. Using 80% replacement rate, that means at retirement the median household would need 54,400 dollars (in current prices) to maintain the same living standards. You are probably thinking well, Dr. A what about inflation, in 30 years prices will be much higher and I need to have more than 54,400. You are correct and you are on your way to being a great economist.

There are some good rules of thumb out there. I like this one by Fidelity. Which gives you an idea of how much of your income you should have saved by age. Going back to our example of someone making 68,000. They would need to have saved $68K or 1 times salary by the age of 30 to be on track to retire comfortably and by 67 years of age they need to have $680,000 in savings. Some would say that is too low, and it might be because it doesn’t consider the cost of inflation.

If you are interested in trying out a more personalized approach. I like this website by nerdwallett https://www.nerdwallet.com/investing/retirement-calculator It takes into account inflation and can be personalized more than the rule of thumb presented earlier.

You are probably asking yourself, how much do I need to save per month to hit $680,000 in retirement savings? If you are thinking that then make sure to watch the video on how to save $680,000.

Do you feel like you are on track with your savings? If not, what is keeping you from meeting your goals? Leave a comment...