How Much Should You Save for Retirement?
March 24th, 2007 by Remon
We all know that saving for retirement is important, but how much should you save? How much is enough?
The problem is that you don’t know how much time you’ve got left after retirement so you can’t predict how much money you need. There’s a huge gap between living 5 years after retirement and living 30 years after retirement.
Ideally, you want to save more than you could ever spend. Unfortunately this is unreachable for most people. Another option is to save enough to live on the interest, which is also my goal. Keep in mind though that future interest rates can not be predicted but hey, we’ve got to set a goal and this is mine.
Say you have 30 years to go before you retire. You currently earn $2000 a month and you want at least $1500 a month from your savings when you’re retired. The house is paid off so it’s basically cost of living only.
Step 1 - Inflation
$1500 now is $2,561.68 in 30 years with a 1.8% yearly inflation rate. To make it easy we use $2550 in our calculations.
Step 2 - How much do we need to save
Considering a 5% interest rate we would need (($2550 * 12) / 5) * 101,8 = $623,016. The 101,8 is 100 percent plus the 1.8% inflation rate.
Step 3 - How much do we have to save monthly?
Considering a 5% interest rate for the next 30 years we would have to save around $745 a month to reach $623,016 in 30 years. If you can get more interest, or growth from mutual fund, you can save less.
If you earn 7% on your investment than you would need around $520 a month to reach that same goal. The more you save ofcourse, the more you’ll get later on.
Conclusion
Although it’s unpredictable how much time you’ve got left after retirement or how much money you will spend during retirement we can secure a monthly income by planning ahead and saving enough money to live on later in life.
The $745 or $520/month examples above are very reasonable I think. When you consider that living expenses aren’t much higher when you’re together with someone it should be very doable to save enough as a couple.