One of the biggest questions that workers should attempt to answer is how much they need to save for retirement. Many people will answer with a response like “as much as I can.” One thing is sure. Those who save more will be able to live more comfortably in their golden years than those who have little or nothing saved.
Recently, a study looked into how much Americans have saved for retirement. Needless to say, the picture is not terribly impressive. According to the Economic Policy Institute, the average working-age American has about $5,000 saved for retirement. This number is admittedly skewed down by those who have nothing saved at all. For those who have retirement savings, the average is a little more than $95,000. Using the popular 4-percent Rule that retirement experts recommend, this would provide a little less than $4,000 per year in income for these future retirees. While this does not account for traditional pensions and Social Security, it’s still a very low level of income.
While $5,000 or even $95,000 is not acceptable for those looking to retire, the question comes up as to how much a person should squirrel away to make ends meet during their latter decades. Most financial gurus recommend that workers save 10 to 15 percent of their salaries each year starting in their twenties. The thought is that this amount, along with compound interest, should basically replace their income from working. Dave Ramsey recommends 15 percent, for example.
In a blog post titled The Shockingly Simple Math Behind Early Retirement, the personal finance blogger known as Mr. Money Mustache shows that saving 5 percent of your salary each year will require you to work for 66 years to build up enough to retire. Those who save Ramsey’s recommendation of 15 percent will need to work for 43 years, which is right in line with the idea of retiring around 65 years of age. Those who can stash away half of their income could theoretically retire after working for only 17 years. Mr. Money Mustache himself retired from his day job at 30. This math assumed a 5 percent return after inflation each year and observance of the 4-percent Rule, which allows retirees to spend down 4 percent of their nest eggs each year.
Some retirement planners argue that you should save up enough to take over 80 percent of your income from working. They assume that you will not have some of the expenses that you had from working like commuting, eating out for lunch and wearing business clothes. However, some retirement planners point out that expenses are the more important variable. Those who argue that expenses are the more important number recommend saving up 25 times your annual expenses. To know how much you need to save, it’s a good idea to take advantage of one of the leading online tools for managing expenses so that you know exactly how much you spend on a monthly basis.
After taking into account how much you need for retirement, it’s a good idea to adjust your budget to get the amount of savings that you need. If you’re saving more than you need, keep it up. You’ll be able to retire earlier. If you’re not, you’ll need to either cut expenses, earn more or combine the two to increase your savings rate.