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How Much Should I Save?
Recommended Retirement Savings
Everyone wants to know "How much should I save for retirement?" A retirement savings calculator can help you plan for a successful retirement.
We would all like to hear that we need not save anything. We hope someone else will take care of our future needs (government, employers, rich relatives, or the lottery).
But, the truth is that the traditional sources that have provided for retirees are increasingly pinched for money.
Businesses are looking for way to reduce expenses, reduce the number of employees, and become more competitive with other businesses worldwide. They are less willing to provide long term financing to retirees.
 Even Fortune 1000 companies are getting out of the business of providing defined benefit plans for their workers. (A "defined benefit" plan provides a pension usually based on number of years worked and final salary.)
When a company freezes a plan employees receive no additional benefits for additional years worked or increases in their salary. When a defined benefit plan is terminated employees get a lump sum payment or an annuity.
In addition, a recent study by Watson Wyatt indicates that only 7% of Fortune 500 companies plan no further cutbacks in retiree medical care benefits. Most employers will further increase in employee contributions. And 6% of employers are planning to totally eliminate health benefits for existing retirees.
Governments are beginning to face the reality of many years of spending splurges and failure to responsibly fund the Social Security retirement scheme. For example, the President's 2007 budget calls for spending $354 billion more than the government takes in from taxes--that's an additional debt of about $2,885 for each individual tax return. And the total national debt is about $68,025 for each individual tax return. And, starting in 2017 the government will be paying out more Social Security benefits than it receives in Social Security taxes, adding to these deficits.
All this means that you should increasing rely on your own savings and investments for your financial future. With the information you have, you can use a retirement savings calculator to help you make the best financial decisions for your situation.
So, you're still asking "How much should I save?" And, the answer is, "It depends."
That's hardly the answer you wanted. But, the fact is, the amount you need to start saving right now depends on the following:
- Current annual income
- Percentage of your current income you invest for retirement
- Number of years until you retire
- Percentage annual increase you expect in your annual earnings
- Percentage of your final earnings you'll spend if retired
- Amount of your pension and Social Security you expect to receive
- Inflation rate during your retirement years
- The amount you currently have invested for retirement
- Expected average growth rate of your investments
That all seems like a lot to know to determine how much to invest, doesn't it? And some important factors like the inflation rate are mostly guesses, at best. But, these are the factors that should go into any retirement savings calculator.
So, let's look at a couple of examples to see how this all works out.
Suppose you are a 25 year old starting in a professional job at $50,000 a year with no savings and expect to see increases in your income and inflation of about 4% a year. And you believe you can invest and get a tax free 8% rate of return. You'll invest for 40 years and need about 60% of your then current income for retirement living expenses. You'll consistently invest 8% of your income for retirement.
At retirement you expect to receive an annual pension from your company of $35,000 and Social Security of $20,000.
You can expect, at age 65 after 40 years of investing that your retirement nest egg will be about $1.765,658. That seems pretty good, but your initial annual spending at retirement will be about $144,031. Overall, your investments will provide 29 full years of income before it is depleted. The value of your investments during retirement will look as follows:
If, instead, you had saved 10% of your income instead of 8%, your retirement nest egg would have lasted 45 years. The value of your investments would look as follows:
As you can see, the amount you save is very important over the 40 years of your working career. The more you save, the more you can expect to have at retirement. And, the longer it will last.
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How Long Should My Investment Last?
The average retiree lives about 19 years beyond retirement.
If you are healthy, active, don't smoke, don't drink in excess, eat a nutritious and healthy diet, and have goals for your life, you may live considerably longer. If you are in this group, you may want consider having sufficient funds to last at least 40 years into retirement.
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Next, suppose you are a 40 year old professional with an established savings of $150,000. You have an income is $125,000 and save 10%. Estimating a salary increase and inflation rate of 4% and a rate of return of 8%, at retirement, 25 years later, you will need an initial retirement income (using 60% of the last annual salary) of $199,938 in the first year of retirement. And, suppose you expect an annual pension of $65,000 and Social Security of $35,000
Your retirement investments of $2,390,986 will run out in 35 years. If you had saved 12% of your income your nest egg would run out after 43 years. Saving 15% of income would cause the nest egg to last 63 years.
But, saving 15% with a 5% inflation rate (instead of 4%) changes things drastically. With a 5% inflation rate, your investments would only last 40 years before they were completely depleted.
So you can see that you need to consider a number of factors to determine that answer to "How much should I save?"
By changing various factors in a retirement savings calculator you can better visualize your options. You can download my "How Much Should I Save?" retirement savings calculator spreadsheet here. See how to change various factors to produce desirable results for your case.
 By using the spreadsheet I provide, you can determine to total amount of savings and investments you need to provide for your retirement needs. Most experts suggest you have an increasing amount of that target saved as you grow older. The saving targets are displayed in this graphical display.
The chart shows that at age 30, you should have between 10% and 20% of your target amount saved. At age 40 you should have accumulated between 30% and 40% of your target. By age 50 you should have 50% to 60% of your target amount. And, at age 60 you should have between 85% to 90% of your savings target.
By starting your retirement savings program early, you can help ensure that you will have the required target amount by the time you actually retire.
Please remember that this retirement savings calculator spreadsheet is only a tool and cannot be any better than the assumptions you make when using it.
Right click on the following link and save the retirement savings calculator spreadsheet to your computer.
How Much Should I Save? Retirement Savings Calculator
You can use Microsoft Excel to load the spreadsheet and enter values in the "Inputs" box. You will see graphical and tabular results that will help you better plan for a successful retirement.
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