Figuring out how much to save each month for retirement can seem like an impossible task.
With all the information that you need to know. Plus all the different calculators that are available it becomes downright frustrating.
How are you supposed to answer this simple question without getting a PHD in finance?
Not to worry, I am going to break this down in easy to follow steps that helps you quickly decide how much to save for retirement each month.
How Much to Save for Retirement Each Month
Step 1: Figure out Your Yearly Income Needed in Retirement
Most resources will recommend you targeting a percentage of your income to replace during retirement. This is typically around 75% of your gross income.
Thus if your income is $100,000 then you would try to save for an annual income in retirement of $75,000.
I recommend instead you focus on how much it actually costs you to live.
This is not only more accurate but for the business owner more realistic. Since our income varies based on how the business does, planning a on just a salary number can be frustrating.
In order to protect your lifestyle in retirement, you need to save for what you spend. It makes no sense to save for an income that is lower than what you spend just because you are using a generic number.
But there's a catch.
This will take you a bit more work. You actually have to know how much you spend and what you want to do with your retirement years!
Yet the best part of this, is if you put in the work, then you don't have to worry in retirement.
Calculation tip: remember to account for the expenses that the business pays for if you plan on selling the business.
Resource tip: to figure out what you want to do in retirement you can check out: Living Forward
Step 2: How Much Of Your Portfolio You Can Spend
The next question you should ask yourself is: what percentage of your portfolio can you access each year?
Most advisers will tell you that between 4 – 8 % is a good target.
This advice also comes from generalized numbers. It is based on assuming that the average inflation will be about 4% a year. Plus that the growth in stocks of about 12%.
Thus based on these numbers your nest egg will remain un-depleted. You keep up with inflation and the market will continue to increase or replace your funds.
But there is a catch.
This is a tough one to make such big generalization about.
Why? Because it is based on too many assumptions.
Including:
- Everyone has the same risk tolerance and will want to stay full invested in the stock market.
- Spending needs will be the same every year.
- You get the same return each year, which never happens!
- That 12% number for return has been knocked down over the past few decades - drastically! Counting on that can be toxic to your plans.
(For more on the problems with the 4% rule, check out this article.)
What should you plan for?
First, if you want to use a generic number then stick to a very low number. Instead of 4 - 8 % plan on 2 - 4%.
The other option is to not deplete your assets by taking out a percentage each year.
Instead create a portfolio that creates enough income for you to live on. This eliminates many of the assumptions, but does need more in assets. (I teach this approach in my financial coaching program.)
Step 3: When do You Plan to Retire
Retirement age will have a big impact on how much money you need to save each month.
Why does this matter?
The older you are when you retire, less you have to save each month.
This is because:
- The older you are when you apply for social security the more you get.
- The more time you have for your investments to grow the more you benefit from compounding.
- The fewer years you will be in retirement, thus reducing how much you need.
Step 4: How Much to Save for Retirement
Now you can determine how much you need at retirement age.
Using the information that you assembled in the steps above, we can determine your nest egg.
Head to this calculator to help you figure out the lump sum needed and monthly savings needed.
Retirement Nest Egg Calculator
Extra information you may need:
- Current amount in retirement savings.
- Inflation anticipated (it does auto fill, but you can change if you want)
- Target return before retirement (I recommend you play with a few different ones)
- Target return after retirement (I recommend you go conservative.)
Hopefully this helped make retirement seem a lit less overwhelming. The key is to get started today so you can have what you need in retirement.
Need more personalized help or looking for alternative approaches to figuring out what to save? Check out my Financial Coaching.
We work on:
- Life planning
- Comparing two different ways of calculating retirement needs
- Implementation plans based on your business and likes
