Today on MYM360 – we continue with a listener question part 3. Kevin asked, “How much money should I be saving for retirement?” Yesterday we talked about the second of three steps in answering this question and that was to decide how much you will need and if you missed it, you might want to go back and listen to Episode 753.
Today, I want to focus on Step 3 which is to calculate how much you need to save. There is a fantastic website that I want to refer you to that will actually calculate how much you need to save to reach your retirement goals each year. As I mentioned before, there is a certain amount of guesswork involved because they will ask you things like your expected age at death, inflation assumption and wage growth assumption.
While I didn’t have all of Kevin’s info, I had some and I guestimated the rest. Then I sent him a link so that he could put in the correct info. So here is what I plugged in for Kevin and the results I received. Kevin is age 45 and he is making $55,000 a year. He wants to be ok until age 100 and he wants replace 80% of his salary and he is planning to retire at age 70. He is assuming that his wages will grow at 2% and inflation will be 2%. He is also assuming that his investments will grow at 8% before retirement and 5% after retirement. He has about $50,000 saved and plans on receiving $1,500 from Social Security. All of the inputs are very conservative.
So here are the results: (Click the chart to enlarge)
|The percentage of total salary he will need to save from now until retirement age to achieve his desired income replacement rate is 16 percent. In other words, from here on out, he needs to save 16% or his salary each year.|
|The dollar amount you will need to save this year is $8,565.
Keep in mind that this rate will increase each year as his income increases. We estimated that his income would increase 2% each year so next year his salary should increase to $56,100 and 16% of that would be $8,976 and on and on each year. The thing I really like about this calculator is that it’s easy to use and you can come away with a good estimate of what you should be saving now to meet your retirement goals. The site is www.choosetosave.org/ballpark I will post a link on our website along with a screen shot of the form I created for Kevin so you can check it out.
And that’s it for today. Got a burning question like Kevin? Send it to me at firstname.lastname@example.org and don’t forget to follow me on Facebook @minding your money
Thanks for listening and as always remember that minding your money really is the path to a richer life!