1. Do the math. What is important to realize is that the exercise of calculating a retirement savings goal does more than simply provide you with a dollars and cents estimate of how much you will need for the future. It also requires you to visualize the specific details of your desired retirement lifestyle. Before you do anything else, answer these important questions: • • • • •
When do you plan to retire? How much money will you need each year? Where and when do you plan to get your retirement income? Are your investment expectations in line with the performance potential of the investments you own? Which expenses will change in retirement? Which will stay the same?
Will you need 70%, 80%, or even 90% of your income to maintain a desirable standard of living after you retire? The answer to this question is your income replacement ratio–the percentage of your pre-retirement earnings that will provide you with the same standard of living in retirement. Calculating your income replacement ratio can be a good place to start thinking about how you will pay for retirement. If you’re earning $80,000 annually, replacing 75% to 80% of your income means you will need to come up with somewhere in the neighborhood of $60,000 to $65,000 annually.
Savings Rate Required to Attain a 70% Income Replacement Ratio Retire at:
Start Saving at:
25 35 45
15% 24% 44% 10% 15% 27% 7% 12% 20% 4% 6% 10%
62 65 67 70
Note: The calculations assume a real rate of return of 4% and the purchase of an inflation-indexed annuity with the same rate as in the National Retirement Risk Index. Source: Center for Retirement Research at Boston College “HOW MUCH SHOULD PEOPLE SAVE?” Alicia H. Munnell, Anthony Webb, and Wenliang Hou, July 2014
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