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Retirement Calculator – How Much Do I Need To Save

Retirement Calculator - How Much Do I Need To Save
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Making peace with getting old is not an easy task to tackle. Thinking about retirement in your 20s might sound exaggerated- but trust me, it’s not.

Planning for the future doesn’t include only the next 5 or 10 years. Your retirement planning needs to start when you start your first job.

When I started my first 9 to 5 job, I didn’t blink an eye for retirement savings. Look at me; I’m 21. I have an eternity to live before I retire!

And then, at 26, I met people who have contributed to their retirement savings for years! Until that moment, nobody around me ever mentioned they are saving for retirement. These people have been putting up to 20% of their pay aside for retirement while I was living my lavish life.

I was the black sheep who didn’t realize that retirement is right around the corner.

I decided to jump on the bandwagon and start saving. But I had no idea how much I need to save?

Do I need to make up for the years I wasn’t saving for retirement?

How do I know how much money I’ll need in 35 years?

Only 1 in 10 people have calculated how much money they need to save to retire comfortably.

There are 2 methods to calculate your retirement savings goal; the first one is to save enough to replace 80% of your current income, so if you make $60,000 a year now, to retire, you need to have $48,000 for each year in retirement. The second one is to multiply your current salary by 12 – if you make $60,000 a year, you need a total of $720,000 in retirement savings.

Do those numbers sound overwhelming? Here’s how to figure out exactly how much money you’ll need.

A Retirement Calculator Helps You Set You Savings Goal

A Retirement Calculator Helps You Set You Savings Goal

Figuring out how much money you’ll be spending each month after 30 to 40 years seems a hard task.

That’s when retirement calculators take over. There are a couple of retirement calculators online where you enter your parameter and find out how much you need to save.

If you already started saving, the calculator will tell you how much you have left to reach the end goal; do you need to increase your monthly payments or decrease and benefit from that money in another way?

Let’s help you understand the calculator’s criteria.

The Annual Cost Of Living In Retirement

As a rule of thumb, you expect the same or lower yearly living expenses in retirement, right? Not really.

On the one hand, you will have paid off your mortgage and student debt and will no longer be saving for retirement. If you’re making $60,000 a year and saving roughly $10,000 for retirement, you’re living off those $50,000 – that’s the amount you need annually when you retire.

But people no longer spend their retirement days drinking tea on the front porch. They are traveling around Europe, buying lake houses, or volunteering in third world countries. How you plan on spending your days in retirement determines your annual cost of living.

Your Current Retirement Savings

If you already contributed towards your 401K, traditional, or Roth IRA, sum them up, and that’s your current retirement savings. 

Americans from 20-29 years of age have already saved $11,800 in their 401K, while those from 60 to 69 have $195,500.

Annual Retirement Contributions

The annual amount you put aside in savings for retirement, like 10 or 20% of your paycheck, is your annual retirement contribution.

The calculators take into consideration the inflation and put a 2% salary increase over time.

Other Sources Of Income In Retirement

If you count on having other income sources like Social Security, pensions, rent, or other regular income, calculate them towards your retirement savings.

If you’re not sure, here’s a calculator to estimate the compensation you’ll receive from your Social Security.

It’s Never Too Early to Start Saving for Retirement

It's Never Too Early to Start Saving for Retirement

Before each necessary sacrifice in life, you ask yourself what you are getting in return. Planning for retirement is no fun and cuts your budget for other luxuries.

If you start saving for retirement when you’re 25 years old, you can contribute as little as 7% of your income and be on track. But if you start contributing when you’re 40, you need to up that to 20% (or more!) of your income.

The majority of Americans have at most 60% in retirement savings to replace their current income. Only 13% of workers are confident they’ll have enough money to retire comfortably.

That explains why 7% of men and 12% of women over the age of 65 live in poverty.

Estimating and Adjusting Your Retirement Needs

Estimating and Adjusting Your Retirement Needs

How you imagine spending your retirement days will determine if you’ll spend less, the same, or more than today.

If you plan on living a more minimalistic lifestyle in retirement, decrease your expenses, chill in your garden and watch the world go by, you’ll be OK with 65% of your income saved for retirement.

Continuing to live the same lifestyle will ask for 70% to 80% of your income (remember, you’re no longer saving for retirement, so you don’t need that 20% on your income).

If your retirement plans include spending your free time the best that you can with great excursions or cruises, you might need 110% of your income in retirement savings.

What’s the 4% Rule And How It Affects Your Retirement Savings

The 4% rule for retirement

We work hard for the largest part of our life, so retirement seems like an ultralong vacation. Can we spoil ourselves too much in retirement? What happens if we outlive our savings?

Running out of money is a significant risk you should work on preventing.

The 4% rule is simple; you calculate all your savings and investments and withdraw 4% during your first year of retirement. You follow that by withdrawing the same amount but adjust it to account for inflation.

For example, if you have $700 000 in your retirement savings, you withdraw $28 000 the first year. The following year the cost of living increases by 2%, so you’ll follow the inflation and withdraw $28 560.

The 4% rule is a plan for 25year in retirement, which is around the average life expectancy and suitable if you retire at 65.

As with every other rule, you don’t have to follow it strictly. It’s more of an example of how much money you need to have in your retirement savings to withdraw yourself a nice paycheck.

You Don’t Have To Be A Millionaire To Retire Comfortably

Living comfortably without being a millionaire

According to the Bureau of Labor Statistics, the median weekly salary for the third quarter of 2020 was $994. How does one save for retirement on that salary without ending up broke?

It’s easy to postpone saving for retirement when you have to pay a mortgage, student loans, kids, a car loan, or save for an emergency fund.

Don’t get scared and completely dismiss saving. Start at a comfortable point, even if it’s only 3% of your pre-tax income. 25% of Americans don’t have retirement savings because they waited too long for extra money or a raise to start saving.

Starting early will make saving for retirement less damaging on your budget, and you’ll feel more at ease.

Earning Doesn’t Stop With Retirement

Earning into retirement

Retiring at 60 will drain your retirement savings; that’s a fact. And if you don’t manage to save what you calculated, it’s not the end of the world. You can still earn some income in retirement.

Think about investing in the stock market, downsizing, or renting out spare rooms (empty nesters don’t need 2500sq feet). If you’re able, you can delay retirement and continue working or get a part-time job you enjoy.

Bottom Line

A retirement calculator is a good wake-up call to set you on the right track of retirement savings.

People are not saving enough. When they retire, they can’t keep up with their lifestyle.

Those with higher income end up living below the middle class, and those with lower income end up choosing between food and medications.

That is not the retirement you imagined.

You can retire with as much as $350 000 or $1 million; ask yourself if that money will give you the retirement you want.

Have you started saving for retirement? How much of your income are you putting towards retirement each month? Let me know in the comments below!

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