How should you calculate how much you need to save for retirement?
What I struggled with before was trying to figure out how much as a dollar amount I needed to save.
It’s really hard to think about how much you might need in the future:
Did I save too little and will now have to eat fancy cat food?
(And exactly how fancy of cat food could I afford?)
Or did I save too much at the expense of my own happiness?
Very possible for some frugal-ites out there.
RESEARCH INTO HOW MUCH YOU THINK YOU MIGHT NEED
I had tried a whole whack of retirement calculators to figure this out, entering the following variables which are a little conservative to be on the safe side:
- Age: 29
- Desired retirement age: 55 (just a conservative guess)
- Years of retirement: 35-40* (90 years – 95 years)
- Current income: $60,000**
- Required (gross) income in today’s dollars at retirement: $40,000 or 75% of $60,000***
- Estimated growth of investments: 6%
- Estimated inflation: 3%
- Estimated extra retirement income from any sources: $0****
- General goal is to reach at least $1M in retirement, but that’s just my savings alone
*I put the maximum because one side of my family has a very good history of living to at least 90, and I like being conservative.
**Average estimate based on the fact that I’ve worked 2 out of 5 years, but make good money when I do work.
I should also mention that as a freelancer, I will keep most of my money IN my company, and withdraw the minimum I need to live each year, so that it can grow in the company, without being taxed twice (once when I do the company taxes, and twice when I do my own personal taxes).
…This is what people refer to as unrealized income, in financial-speak. I only take the money out as dividends as the sole shareholder, and I keep the rest in the company as my retirement nest egg.
***I could easily live on this if I set my mind to it. It’s quite generous.
****Any government retirement income such as social security, or my Canadian Pension Plan is considered $0 to me, as I am a freelancer and I don’t really pay into those plans because I take the money out as dividends and it is not counted as ‘earned income’
HERE ARE THE FOLLOWING RESULTS
TD CANADA TRUST RETIREMENT CALCULATOR = $254.75/month
- Had to play around with the numbers and put in to save $3057/year to get the amount below
FINRA RETIREMENT CALCULATOR = $833.18/month
KIPLINGER RETIREMENT CALCULATOR = $1488/month
- 35 years in retirement
- 6% conservative estimate
- 75% of $60,000 = $45,000 net in today’s dollars
BLOOMBERG RETIREMENT CALCULATOR = $1523.48/month
MSN MONEY RETIREMENT CALCULATOR = $1830/month
- For the sake of knowing how much to save now, I put $0 as annual savings
CHARLES SCHWAB RETIREMENT CALCULATOR = $2208.33
THEY ALL HAVE A VERY BROAD RANGE
Going from $275 to $2209 of savings a month, it can be really hard to figure out which one is “real” so to speak.
It can be easy to say: Oh hey, that $275 a month? That works for me! Done and DONE.
…but do you really want to bet that you should save less now, and you will change your lifestyle in the future when you’re old to become more frugal?
You could actually go the other way and end up spending more than you expected.
FIGURE OUT THE AVERAGE FOR A BENCHMARK
At this point, what you can do is figure out the average, which in this case was $1356.29.
If you rounded it up to a nice number like $1500, that could be considered my “minimum” for saving, if I wanted to feel like I’ve done enough to hit a bare minimum.
To have a slightly more comfortable peace of mind, you could go up to $2000, and I’m sure that would be more than enough for you.
However if you are anything like me, (paranoid I will be eating Meowmix when I’m 95), I doubled that $1500 to $3000 to be on the safe side, plus accounting for the fact that I will probably have expenses I have not foreseen in the future:
- medical expenses
- grandchildren to spoil
- traveling to European countrysides where I eat cheese all day long
Thus, I will always try to meet this goal of saving at least $36,000 net a year, and while it isn’t easy, it’s a nice number that will set my mind at ease if I hit it each year.
OH AND DON’T FORGET TO NOT COUNT YOUR SIGNIFICANT OTHERS
I am planning on saving all of this money on my own, and my overall goal is to reach about $1,000,000 in retirement. Should be enough.
I am not counting any kind of government pension, windfalls, inheritances (haha!), or my significant others’ income. I’d rather all of that be a happy bonus, and not something to actually factor in and count on.
It spurs me on to save more.
Maybe it sounds like it’s overkill to you, but the way I see it — as I make an extraordinary income, I should also save an extraordinary amount as well.
After all, if I spent more money each year on my current wants, I’d just get used to them (lifestyle inflation) and start upping the ante for future years, which will end badly, I’m sure of it.