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Retirement Advice: How Much Should You Save?

Posted by Shanna Tingom, AAMS® on Sep 28, 2016 9:00:35 AM

How much should you save for retirement? There are many different theories, each recommending a different amount for a safe and secure level of retirement savings. But, if you want a general idea to help shape your plans for the future, you should try this relatively simple method as recommended by US News.

Step 1. Determine your average monthly household expenses

Then multiply by 12 and add in yearly bills like insurance, taxes, and vacation expenses. This is your yearly expense now. In order to calculate your yearly expenses in retirement, take this amount and subtract:

  •  The amount you’re saving for retirement each year (you won’t be saving for retirement when you’re retired)
  • The amount you pay in payroll taxes
  • A portion of your housing expenses, if you plan on downsizing
  • Commuting and other work-related expenses

Of course, there are other adjustments you could (and should) make, including adding a travel budget, expanding your healthcare/insurance budget, reducing grocery expenses, and adjusting the amount of support you’ll be contributing to children. In the end, however, you should expect your cost of living in retirement to drop by as much as 30%.

Step 2. Double check

Financial experts estimate that the average person needs need about 75-80% of their preretirement income to sustain their standard of living after they retire. If you plan on downsizing, of course, this amount may be lower for you, but this number provides a good second-figure to consider alongside the more detailed number you factored out in step 1.

Step 3. Retirement income

Add up the household income you’ll receive per year in retirement. This includes any money you get working, from a pension, from Social Security, renters, babysitting, or any other income sources.

Subtract this yearly income from your expenses. If you’re like most people, your retirement expenses will be quite a bit larger than your retirement income (a positive number, not 0 or a negative). Therefore, this number represents the income gap you need to deal with by saving and investing for retirement.

Step 4. Take your income gap and multiply it by 25

This number is the amount of savings you need in order to withdraw and live off the recommended 4% annually.

As the US News article details,

“Suppose you’ll spend $5,000 a month to keep yourself fed, clothed, housed and happy in retirement. You estimate you’re getting $1,500 a month from Social Security and $1,500 a month from your pension, for a total of $3,000 a month. That results in a shortfall of $2,000 a month, or $24,000 per year. And $24,000 x 25 = $600,000. That’s the amount you need in your individual retirement account, 401(k) or other savings vehicle to close the gap of $2,000 a month.”

Of course, these are only estimates and life is notoriously hard on our best laid plans. But a good retirement schedule can help you prioritize your saving and put you in a better position to retire on your schedule and on your terms, with enough to enjoy the fruits of your career and live the way you want to live.

For more information, including formal retirement planning and scheduling, call 480-397-1184 and make an appointment with Heritage Financial Strategies of Gilbert, Arizona!

Topics: How Much Should I Save, Retirement Planning, Secure Retirement, Sufficient Retirement Savings