How much should you save each year for retirement? The rule of 30
I’ve written before about a Fidelity benchmark floating around on how much you should save for retirement, but here’s another benchmark via Yahoo from Jim Otar of RetirementOptimizer, and that’s the rule of 30.
You should take how much you need each year for retirement, and multiply that by 30.
So let’s say you need about $50,000 of income each year in retirement.
$50,000 x 30 = $1.5 million
The multiplication by 30, allows you to (roughly) account for inflation and life span (average is 82 for women and 77 for men in Canada).
It’s a pretty simple retirement calculation to use if you don’t want to get down and dirty, but there are some things you should be aware of.
IT DOESN’T LET YOU RETIRE EARLY
The only flaw I see in it, is it doesn’t take retiring early into consideration. Let’s say you DON’T want to work until 65, how much do you need then?
The multiplier will obviously be higher than 30.
DON’T FORGET ABOUT YOUR COMPANY PENSION & GOVERNMENT PENSIONS
Another point that shouldn’t be forgotten is any company pension plan, or government pension plan. In Canada, we have the OAS (Old age pension) and CPP (Canadian pension plan).
The article makes a note that a couple who makes about $100,000 a year, can expect to receive about $33,500 from these three sources of retirement income.
So if the couple in the article wants $50,000 of income, they only really need to make up the difference to $50,000 which is $16,500 a year, and to save at least half a million on their own.
YOU NEED TO START SAVING BY AT LEAST AGE 35
FInally, you need to start saving at least $10,500 a year (net) by age 35 to reach this half a million dollar goal.
Here’s the chart that was created of how much you should have in your retirement plans by age, assuming 5% interest rate of return and accounting for 2% inflation:
- 25 = $0
- 35 = $0
- 45 = $121,500
- 55 = $283,500
- 65 = $500,000
For those of us who are PF geeks, we’ll probably be groaning and clutching our heads at the big fat $0s staring at us for the ages of 25 to 35, but for you late bloomers to the money management game, it still gives hope that you can turn your finances around and make an impact.
PERSONALLY, I FIND IT A BIT LOW, BUT THEN AGAIN, I’M A FREELANCER
Personally I find saving $500,000 by the time I retire a bit low, but then again, I’m someone who can’t really count on government pensions.
See, with my company, I can only withdraw money as dividends, and as a result, I don’t actually earn a “salary”, and I don’t get any RRSP ( or like a 401K ) retirement room to contribute to, because it isn’t “earned income” in the government’s eyes.
The RRSP room is calculated as 18% of your earned income in a year, and we don’t get a set limit to be able to contribute to like the 401K in the U.S. that gives $17,500 a year.
All I have is my TFSA room ( a lot like a Roth IRA for you Americans ) which is about $5500 a year.
As a result, I have to save the entire $1.2 million on my own, which is why it makes me highly motivated to continue saving at least $50,000 net a year on average before I decide to retire.