Retirement Planning: Unveiling The Ideal Investment Amount

There is no one-size-fits-all answer to how much one should invest for retirement, as it depends on a variety of factors, including age, lifestyle, income, and desired retirement age. However, a common rule of thumb is to save between 10% and 15% of your pre-tax income annually, with the aim of having a nest egg that can replace around 80% of your pre-retirement income. This can be achieved through a combination of savings, Social Security benefits, and other sources of income such as pensions.

It's important to note that this is just a general guideline, and individual circumstances can vary greatly. For example, high earners may want to save more, while low earners may be able to save less, as Social Security may replace a larger portion of their income. Additionally, those who plan to retire early or have a more expensive lifestyle during retirement may need to save a larger proportion of their income.

Retirement calculators can be a useful tool for estimating how much you should save based on your current income, expected expenses in retirement, and other factors. These calculators use assumptions about inflation, life expectancy, and market returns to provide an estimate of how much you will need to save.

It's also crucial to regularly review and adjust your retirement plans as circumstances change, whether due to a new job, a new addition to the family, or a change in your financial situation.

How much should I save each year?

How much you should save each year for retirement depends on a variety of factors, including your age, income, and retirement goals. Here are some guidelines and strategies to help you determine how much to save annually:

General Guidelines

Most financial experts recommend saving between 10% and 15% of your pre-tax income each year for retirement. This range can serve as a starting point, but the specific amount you should save may vary based on your personal circumstances.

Income and Age Milestones

It's important to save a significant portion of your income by certain ages to ensure you're on track for retirement. Here are some milestones to aim for:

• By age 30, aim to save at least one time your annual income.
• By age 40, aim to save three times your annual income.
• By age 50, aim to save six times your annual income.
• By age 60, aim to save eight to eleven times your annual income.
• By age 67, aim to save ten times your annual pre-retirement income.

Lifestyle Considerations

Your desired retirement lifestyle will impact how much you need to save each year. If you plan to travel extensively or maintain your current standard of living, you'll need a higher income in retirement. Consider your expected expenses and adjust your savings plan accordingly.

Rules of Thumb

One common rule of thumb is the 80% rule, which suggests that you should aim to replace 80% of your pre-retirement income in retirement. However, this may vary depending on your circumstances. Some people suggest 70%, while others recommend a more conservative approach of 90%.

Retirement Calculators

Online retirement calculators can be a helpful tool for estimating how much you should save each year. These calculators consider factors such as your current income, expected expenses in retirement, inflation, life expectancy, and market returns to provide a more personalized savings plan.

Social Security and Other Income

Remember that not all of your retirement income will come from your savings. Social Security benefits and pensions can also contribute significantly to your retirement income. However, the percentage of income replaced by Social Security is typically lower for higher-income retirees.

Start Saving Early

The earlier you start saving, the more time your investments have to grow. Even if retirement seems far away, making saving a priority now will pay off in the long run.

Regularly Revisit Your Plan

Circumstances can change, so it's important to regularly review and adjust your retirement plan. This includes considering any new financial goals, such as buying a home or starting a family, and adjusting your savings and investment strategies accordingly.

How do I calculate a personalised retirement savings goal?

There are many factors that determine a person's retirement savings goal, and it's important to make steady progress toward saving for retirement, no matter your age.

A general rule of thumb is to save 10% to 15% of your pre-tax income per year during your working years. For example, if you make $50,000 a year, you would put away anywhere from $5,000 to $7,500 for that year. By saving 10% starting at age 25, you could potentially have a $1 million nest egg by the time you retire.

Another rule of thumb suggests that an income of 70% to 80% of a worker's pre-retirement income can maintain their standard of living after retirement. For example, if someone made $100,000 a year during their working life, they could maintain their standard of living with $70,000-$80,000 a year of income after retirement.

Some experts claim that savings of 15 to 25 times a person's current annual income are enough to last them throughout retirement.

There are many online retirement calculators that can help you determine your retirement savings goal. These calculators take into account factors such as your current age, income, savings, expected retirement age, life expectancy, and investment returns.

• Determine your expected retirement age. In many countries, the full retirement age when you are eligible for full Social Security benefits is 67. However, this may vary depending on your location and personal circumstances.
• Calculate your expected income in retirement. This includes any Social Security benefits, pension plans, or other sources of income you expect to receive during retirement.
• Estimate your expected expenses in retirement. Consider your desired standard of living and any specific goals or expenses, such as travelling or medical costs.
• Use a retirement calculator to estimate your savings goal. These calculators will take into account your current age, income, savings, and expected retirement age to determine how much you need to save.
• Adjust your savings rate accordingly. Based on the results of the retirement calculator, you can adjust your savings rate to ensure you are on track to meet your retirement savings goal.
• Start saving early. The earlier you start saving, the more time your investments have to grow. Even if retirement seems far away, it's important to make it a priority.
• Take advantage of tax-advantaged savings accounts. Utilise accounts like 401(k)s, IRAs, and other tax-efficient vehicles to maximise your savings and reduce your tax burden.
• Seek professional advice. Consult a financial advisor or planner to review your retirement plan and provide personalised recommendations based on your circumstances.

Remember, it's important to regularly review and adjust your retirement savings goal as your life circumstances change.

What are common rules of thumb for retirement savings?

While no estimate fits every situation, there are some common rules of thumb for retirement savings that can help you stay on track. Here are some general guidelines to consider:

• Save 10-15% of your income for retirement: This is a general rule of thumb, but it's important to note that starting to save in your mid-20s or early 30s is ideal. If you start saving later, you may need to save more to maintain your current standard of living during retirement.
• Aim for savings milestones by age: By age 30, aim to save 1x your salary, by age 40, aim for 3x, by age 50, aim for 6x, and so on. These milestones can help you stay on track and ensure you have enough income to maintain your lifestyle during retirement.
• The 4% rule: This rule suggests that you withdraw 4% of your portfolio each year during retirement. This amount can be adjusted for inflation, and it gives you a high probability of not outliving your money during a 30-year retirement.
• Retirement portfolio allocation: A common rule of thumb is to have 100 minus your age in stocks when you retire. This means if you're 60, you should have 40% of your portfolio in stocks. However, this may vary depending on your risk tolerance and capacity.
• Save 10x your income by age 67: This is a guideline suggested by Fidelity, which includes saving 15% of your pre-tax income annually, assuming retirement from age 25 to 67.
• Use savings benchmarks: Many financial firms publish savings benchmarks relative to an individual's income and age. While not a substitute for comprehensive planning, they can help you gauge if you're on track and prompt you to take action.

It's important to remember that these rules of thumb are just starting points, and personalized financial planning is crucial to ensure your retirement savings strategy aligns with your specific goals and circumstances.

How do I use a retirement calculator?

Retirement calculators can be a great way to see how your savings are doing so far and what you need to change to meet your retirement goals. Here is a step-by-step guide on how to use a retirement calculator:

Annual pre-tax income

First, input your total income before taxes are deducted. This includes your salary, business earnings, and any other regular sources of income.

Current retirement savings

Next, you will need to enter the total current balance of all your retirement savings accounts. This includes 401(k) plans, individual retirement accounts (IRAs), and any other accounts specifically for retirement.

Monthly contribution

Input how much you save for retirement each month. Include contributions to your 401(k) (plus your employer match), IRA, and any other retirement accounts. The recommended amount to save for retirement is 10% to 15% of your pre-tax income.

Monthly budget in retirement

Estimate how much you think you’ll need each month to live comfortably throughout your retirement, before taxes. You can do this by looking at your current spending and projecting how it might change when you retire.

Other retirement income (optional)

You can also enter any additional retirement income you expect to receive, such as pension benefits or Social Security.

Retirement age

Enter the age you plan to retire. If you were born in 1960 or later, 67 is considered a full retirement age, when you will receive full Social Security benefits.

Life expectancy

Input how long you expect to live. Your retirement savings and income will need to last throughout your life, so it is generally recommended to aim high.

Pre-retirement and post-retirement rate of return

Input the rate of return you expect your investments to earn between now and retirement, as well as the expected rate of return during retirement. The pre-retirement rate of return is typically higher because most people invest at least a portion of their portfolio in lower-risk investments later on.

Annual income increase

Enter the average annual increase you expect in your income over the rest of your working years.

Once you have entered all the necessary information, the retirement calculator will provide you with an estimate of your retirement savings and how much you will need to save to reach your target. Keep in mind that this is just an estimate, and it is always a good idea to consult with a financial professional for more personalized advice.

How often should I revisit my retirement plan?

It's important to regularly revisit your retirement plan to ensure you're on track to meet your retirement goals. While there's no one-size-fits-all answer to how often you should review your plan, here are some guidelines and factors to consider:

• Annual Review: Aim to conduct a comprehensive review of your retirement plan at least once a year. This gives you an opportunity to assess your progress, make any necessary adjustments, and ensure your strategy remains aligned with your goals and risk tolerance.
• Life Events: Major life changes can impact your retirement plan. Consider revisiting your plan when you experience events such as getting married, having children, changing jobs, receiving an inheritance, or purchasing a home. These events may require adjustments to your savings rate, investment strategy, or retirement timeline.
• Market Conditions: Keep an eye on market conditions and their potential impact on your retirement portfolio. For example, market volatility or shifts in interest rates may prompt you to reevaluate your investment mix or risk exposure.
• Progress Toward Milestones: It's a good idea to periodically check your progress against established retirement milestones. For example, by age 35, aim for retirement savings of one to one-and-a-half times your current salary. By age 50, aim for three-and-a-half to six times your salary, and by age 60, strive for six to 11 times your salary.
• Contribution Increases: Regularly assess your ability to increase your retirement contributions. Aim to increase your contributions annually, especially if your income is growing. This can help you boost your savings and ensure you're taking full advantage of tax-advantaged retirement accounts.
• Rebalancing: Your retirement portfolio's asset allocation can drift over time as different investments grow at varying rates. Periodically rebalancing your portfolio—for example, once a year—helps ensure it remains aligned with your risk tolerance and long-term goals.
• Retirement Horizon: As you get closer to retirement, you may need to adjust your investment strategy accordingly. The years leading up to retirement are crucial for ensuring your savings and investments are on track to support your desired retirement lifestyle.

Remember, retirement planning is an ongoing process, and regular reviews are essential to stay on course. While the above guidelines provide a framework, you may need to adjust the frequency of your plan reviews based on your unique circumstances and the dynamics of the financial markets.

Frequently asked questions