Understanding your needs and goals is the first step in financial planning. When you have a clear view of your goal, you are able to save for it optimally and invest in suitable instruments. For instance, if you are preparing to buy a home, you can plan how much money you need for the down payment and mortgage. This way, you can invest your money in an instrument that meets your timeline and offers adequate returns to counter inflation and buy the house of your dreams. Once you know your goal, you can also adjust your monthly budget and make room for your savings and investments.
However, doing the same for retirement can be tricky. Firstly, retirement planning can start in your 20s. If you retire at the age of 65, the investment horizon can be over 40 years. This is a long time to plan for inflation, healthcare expenses, long-term care costs, and other retirement expenses. While the long horizon makes it easy to save up and eases the burden of investment, it can also be confusing. Most retirement planners struggle with the question of how much to save per month for retirement. Fixing an amount can be confusing, as various factors can affect your progress, journey, and above all, the result. If you want to understand what factors you should consider while calculating a monthly savings goal for retirement, reach out to a professional financial advisor who can guide you on the same.
Knowing how much to save monthly for retirement can require a few critical steps, but it is not all that hard. Read on to know more.
Different rules apply to saving for retirement. Here are two rules that can help you decipher how much to save for retirement per month:
Some financial experts recommend saving at least 15% of your annual income every year. This 15% includes your pre-tax income as well as accounts where your employer may be matching your contributions. The 401(k) retirement account is an excellent example to consider here. Although not mandatory, many employers match the employee’s contribution and contribute to the 401(k). If you have a 401(k) and your employer contributes to it, you can consider both contributions in the 15% of your retirement savings calculations. Additionally, the 15% rule is only applicable if you start planning in your mid-20s and retire at the age of 67.
Some studies show that most retirees require between 75% to 80% of their pre-retirement income after they retire. This is sufficient to maintain the same standard of living. The precise percentage can depend on factors like your annual income, retirement age, the age you start saving, etc. For instance, if you have a higher yearly income or progressively move up the professional ladder and fall into a high-income bracket eventually in life, you may find it easier to reach the 75% mark sooner than someone earning less.
It is also important to remember that you may have other sources of income in retirement apart from your savings from retirement accounts. Social Security benefits make up a good portion of your retirement income. Along with Social Security, you can aim to use the 15% savings rule to account for at least 45% of your retirement expenses. However, it is also vital to account for external factors like inflation. The 15% savings rate is calculated on your income, assuming it will increase and counter inflation. If your income does not grow in tandem with inflation or you have been out of work for some years, you may have to save more aggressively to make up for the difference.
The $1000 rule is another rule that can help you decide how much to save each month for retirement. The rule states that for every $1000 you need in retirement, you must save at least $240,000. So, if you want $1000 per month in retirement and you withdraw 5% of your savings, you would need a corpus of $240,000 (5% of $240,000/12 = $1000).
However, this rule is only helpful for a retirement that lasts 20 years. If you retire at 65 and live on to 90, you will likely run out of your savings for the later years of your life. Moreover, the rule is not conclusive of inflation. $1000 a month may be sufficient in the present. However, its value will erode in the future, and you will likely find it hard to cover your expenses within the said amount in retirement.
Irrespective of the rule you follow, having adequate savings for retirement is a must. The precise value of your savings can be decided on the basis of your income, age, retirement age, life expectancy, financial liabilities and responsibilities, etc. It can help to ensure that you have at least 75% to 80% of your pre-retirement income saved up. This is ideal for covering your unique costs and countering inflation. Expenses are usually lower in retirement. However, health costs and inflation remain a cause of concern no matter how low your retirement budget goes.
You can follow the tips given below to save adequately:
Online tools, such as retirement calculators, can lessen the ambiguity and give you precise estimates of your future requirements. With the evolution of the internet, online financial planning tools have been a boon, and using them effectively can help you create a foolproof plan. You can use a retirement calculator If you are unsure of how much to save or when to start saving. The calculations are mainly based on factors like your age, income, retirement age, debt, etc. These calculators add inflation on the basis of past trends and offer you a precise estimate of how much to save per month for retirement. This can be a great way to simplify things and be sure of the choices you make.
Setting targets helps you break down the bigger goal of retirement planning into smaller achievable feats. You can set targets per age and try to reach the objective by the said age. This is a more conclusive approach as you can take into account current scenarios like market movements, fluctuating stock prices or interest rates, inflation, recession, etc., and adjust your plan and savings strategy accordingly. It also eliminates procrastination and ensures that you save regularly instead of postponing for the future.
Here’s how this can be planned:
This method is ideal if you start saving in your 20s. If you start in your 30s, you would have to cover up for the lost time by investing or saving more aggressively and living more frugally. However, the most significant advantage here is that you have a streamlined path to follow. You can also easily track your growth and take remedial action if you find yourself falling short any step of the way.
While the 401(k) is a brilliant retirement planning tool, it cannot suffice as the sole savings vehicle for the future. A 401(k) account is a company-sponsored plan, and not all employers offer it. It can help you build savings for as long as you stay in a job that provides you with this account. It is not mandatory for all employers to offer the 401(k). So, if you switch jobs and your new employer does not give you one, you would stand to lose. Likewise, if you quit your job and decide to go into business for yourself, you would not have the privilege of depending on this account anymore. Therefore, investing in other options not tied to your employment is essential, such as stocks, bonds, mutual funds, exchange-traded funds, or even an Individual Retirement Account (IRA). An IRA can be opened with a bank, a broker, or a trade union. You can open it for yourself and do not need the employer to do it for you. In 2022, you can contribute up to $6,000 per annum in an IRA. People aged 50 or above can contribute another $1,000, too. The contribution limit for a 401(k) is capped at $20,500 in a year as of 2022. The catch-up contribution for those aged 50 or more is capped at $6,500. While the contribution limits for an IRA are lower than a 401(k), it can still be a good addition to your portfolio.
When investing your money, it also helps to invest for different goals. You can have varied goals within retirement, too. For instance, you can invest separately for health-related expenses through insurance. Likewise, you can invest for a child’s future needs like higher education or wedding expenses individually, and build an emergency fund on the side, too. This can help you cover all heads and create a solid, unwavering retirement corpus.
With professional experience and the right educational background, financial advisors can be in a better position to guide you on how much to save each month for retirement. Financial advisors are professionals who assist with a host of financial planning components like tax management, debt management, estate planning, succession planning, budgeting, and most importantly, retirement planning. A financial advisor can help you create a personalized and customized plan that reflects your distinct needs, goals, limitations, and liabilities. Every individual is different and generalized rules like the 15% or the $1000 rule may not apply to every person. Even if you incorporate these rules into your retirement plan, you may still need to make certain adjustments to ensure that you are able to make the most of them. A financial advisor can do this for you and help you with other roadblocks too. Tax, inflation, debt, etc., can stall your growth. Financial advisors aim to remove these hurdles from your path by creating a comprehensive financial plan for you.
Most retirement planning strategies, studies, and rules are formed on the basis of a long investment horizon that starts in your 20s and ends in your late 60s. The full retirement age in the U.S. for those born in 1960 or later is 67 years. Assuming you start saving at 25 and retire at the full retirement age, you have 42 years to prepare for your golden years. This gives you ample time to save, earn long-term investment returns, and beat market volatility and short-term hindrances. If you start saving in your 30s or 40s, you considerably cut short the time at your disposal and create more pressure on yourself. Therefore, it is strongly advised to start planning for your retirement as soon as you start working and be steady at it for the entire length of your career. Unpredictable events like recessions, pandemics, health issues, etc., can force you out of work when you least expect it. So, being proactive and starting in your 20s is very critical.
There is no definitive answer to how much to save for retirement per month, but some common principles can guide you. Having said that, it is better to follow professional, personalized advice from a financial advisor than to blindly follow a figure that your peers may be chasing. No two retirement plans can be alike, which is why mimicking others can never be the solution. What does help is taking a good look at your lifestyle, goals, income, age, debt, and other similar factors and plan accordingly.
If you need help in deciding how much to save monthly for retirement, you can get in touch with a professional financial advisor in your city who can help you create a budget to keep your expenses in check and be regular with your savings. Use the free advisor match service and get matched with 1-3 vetted wealth managers that can help you with your unique financial needs and goals.
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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.