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The Challenges in Figuring out How Much to Save for Retirement

The Challenges in Figuring out How Much to Save for Retirement

One of the most common questions that arises as individuals start planning for retirement is how much they need before they can stop working. There is, unfortunately, no easy answer to this question, and much of the conventional savings advice fails to account for the individual differences that can drastically change savings targets. For instance, one common rule of thumb says that you should save $1 million or about 12 times your preretirement salary. However, you may end up spending more money in retirement than you do now, especially if you plan to travel a lot or engage in expensive hobbies. Many experts argue that $1 million is not a high enough goal.

Calculating a Realistic Retirement Budget


Ultimately, the question of how much you need to save depends on how much you will end up spending in retirement. While it is impossible to guess the amount needed exactly due to price fluctuations over time, you can make a budget to get a ballpark estimate and use this figure to guide your savings over time. Luckily, there are online tools for estimating the costs of housing, food, transportation, clothing, and entertainment once you retire. However, you will need to adjust these estimates according to lifestyle factors. For example, if you love to entertain, you may need to increase your grocery budget.

Some of these expenses can change over time in retirement. Health care, notably, often increases over time, so it important to account for that increase. At the same time, your travel budget and other expenses can decrease as you grow older, so sometimes the balance remains about the same. However, this is a personal issue and you will need to consider your lifestyle expectations as well as your overall health and life expectancy. As mentioned above, creating an accurate retirement budget is nearly impossible, but a general one can serve as a guide for helping you determine whether you are on track for retirement.

Accounting for All Expected Retirement Income

Once you have a budget for your retirement years, you can start figuring out what you need to save to reach that income. Importantly, you will have more income sources than investments once you retire, so you should account for all of these options as you start to plan.

For most people, Social Security will serve as a backbone for retirement income. While benefits may be reduced in the future, it is unlikely that this benefit will go away completely. Social Security payments are based on a particular algorithm, so you should be able to get a good sense of how much you will get depending on when you start claiming the benefit. Other potential sources of income include savings and investments other than retirement accounts, which could be anything from rental income to accounts with tax advantages.

In retirement, you may also have a pension or inheritance as well as income from selling things like homes or businesses. Of course, you may still have some work income once you retire if you continue on a part-time basis or do occasional consulting. While this income can be helpful, counting on it for retirement savings purposes can be dangerous—work circumstances can always change. If this happens, you may have a major gap in your expected income. According to a recent report, while nearly 80 percent of people preparing for retirement expect to continue working in some capacity, less than 30 percent do.

Tracking Savings toward the Identified Goal

Once income sources are accounted for, you will have a better sense of the amount you need your retirement accounts to generate each year. However, there are different rules and expectations for withdrawing from these accounts each year. In general, experts recommend withdrawing 4 percent the first year and then adjusting that figure each year for inflation. This strategy is meant to keep accounts generating sufficient interest to keep you afloat without draining your retirement savings. While you may end up needing more or less depending on personal and economic circumstances, it is a good place to start.

Of course, the next question you may ask is whether or not you are on track toward that goal. Typically, the amount that people can save in their retirement accounts increases over time as they advance in their careers and make more money. However, money saved earlier has more time for interest to compound and ends up being worth more in the long run. Therefore, the question of whether you are on track can be difficult to answer. Various online retirement calculators can help you project where you will be based on current savings and expectations for the future. These calculators can show you how small adjustments to monthly contributions can radically increase savings down the line, and they are a great way for guiding decisions about catching up on savings.