How To Calculate What You Should Be Saving For Retirement

How To Calculate What You Should Be Saving For Retirement

The older you get, the faster time goes. At least, that is what it feels like. One minute you just got married, the next you are teaching your kids how to drive. Time moves quickly. Which is why we encourage everyone, no matter their age, to consider how they will afford retirement. 

Saving for retirement can be a tricky thing to master. There is so much advice online and many of us may fall into the belief that it is too early to be thinking about saving for retirement. When the truth is it is never too early to be setting funds aside for your later years. 

While we would like to be optimistic, the reality is sometimes things happen. Later in life trouble can come our way in the form of a recession, illness, loss of a job, a spouse, or any number of situations that can cause financial hardship. Which is why it is even more important to begin planning for retirement as soon as possible. 

In the following article, we detail how to calculate what you should be saving for retirement. Unfortunately, it is not as easy as a percentage of income or a simple list of expenses. It is a process and one that you should consistently come back to throughout your lifetime. But let’s start here….

Begin by Determining Your Needs

Begin by adding up all the monthly expenses you predict you will have during retirement. 

A good place to start is with the monthly expenses you currently have. This can give you a basis for how much you will spend on things like food, gas, and entertainment. Of course, this is only a starting point. Depending on where you are in life this could drastically change. 

For example, if you have multiple children your grocery bill is likely going to be a bit higher now than what it should be during retirement. Consider this in your calculation. You also may be able to completely scratch off some expenses, like a mortgage. 

Write down all of these expenses to give you a good starting point. 

Now add to the list things you hope to do during retirement. Maybe you hope to travel, spoil grandkids, or a road trip across the country. Consider these monthly expenses in your calculation and add them to the list. 

Multiply your monthly expenses by 12 and compare them with your annual income. What percentage of your current annual income do you see yourself needing for retirement?

How Much To Save

It is recommended that you replace 70% – 90% of your pre-retirement income. This means if you save a little of your annual revenue each year when you do retire, you should have savings sustaining you that equals 70% – 90% of your pre-retirement income. 90% is on the more conservative side.

How do we achieve that preretirement income? A recommended place to start is by saving 15% of your current annual income. This is a general rule and many factors play into this calculation, but it can be a good place to start if there are too many unavailable variables for you to make an informed decision. 

Consider A Retirement Calculator

The percentage calculated above is a great starting point. To get even more accurate information, you should consider looking into a retirement calculator or two. Using a retirement calculator can help estimate whether you have realistic expectations or need to make adjustments.

A retirement calculator will account for things like inflation, life expectancy, market returns, your age, location, when you would like to retire, and investment rate of return. Once you enter in your information you will be provided with a plan for how to achieve your goals.

Retirement Calculators

Each retirement calculator may differ slightly in how they calculate your retirement, so we recommend testing out a few options. Some calculators we prefer include:

Each of these calculators differs slightly but can overall be helpful in your calculation.

Check-In Every 3 Years

Calculating your retirement does not need to be an exhaustive process. Having a running document that tracks current expenses and expenses you hope to experience, like traveling, can be a document you consistently refer to. 

As time goes on be sure to make adjustments. Maybe you get married, have another child, buy a house, or win the lottery! Make the appropriate changes and check in with a retirement calculator every 3 years or shortly after any major life event. 

Realistically speaking, what you are consistently saving today for retirement will not be the same amount you should be saving tomorrow. 

Saving for retirement is not the most exciting part of handling your finances but it may be one of the most important. As business owners, we have processes for keeping track of all of our finances. It is important we also apply a process to our retirement planning.

Calculating for your retirement will not be a one time occurrence. Rather it will be an evolving piece of your portfolio you build over time. There will be times you should and can contribute more. Other times it will be more difficult. The important thing here is that you are staying on top of managing your finances to achieve your retirement goals.

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