Planning for Retirement: How Much Do You Need?

Retirement seems like such a long way off that you may rarely think about it. You’re too busy working, taking the kids to soccer practice, and planning your vacation to worry about something that’s decades into the future.

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But who knows? You may want to retire early and do even more traveling. You may want to start that hobby you’ve always wanted to do.

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And every day, the time between now and the day you stop working becomes shorter.

But Americans aren’t saving much. According to SmartAsset, the median retirement savings among average adults is only $60,000. That’s enough to live on for about a year.

You need to start planning for retirement and saving now to make sure you have enough money to live on comfortably whether you’re 35 or 60 when you retire.

Consider These Four Steps When Planning For Your Retirement

In this article, we’ll cover the four steps you can take to get a rough estimate of how much you’ll need in retirement and how much to set aside each month to reach that number. Let’s dive in.

#1: Estimate How Much You’ll Spend Annually in Retirement

It’s almost impossible to know what your expenses will be in retirement, so just use your current annual expenses. You probably won’t be spending as much money as you do now, but let’s not try to predict future spending. For this example, let’s assume you spend $80,000 per year right now. That will be your annual retirement spending.

#2: Adjust Your Spending for Inflation

A dollar today won’t  equal a dollar in twenty or thirty years. Inflation makes goods and services more expensive in the future compared to their prices today.

So, what does $80,000 look like in forty years? If you assume an inflation rate of 2.5 percent annually, it comes out to about $215,000. In other words, in forty years, spending $215,000 will be equivalent to spending $80,000 today.

#3: Calculate How Much You’ll Need in Forty Years to Support Your Annual Expenses

A quick and easy way to do this is to multiply your estimated future expenses by 25, which is an average number of years you might live after retirement. In our case that would be $215,000 (your future expenses) x 25 = $5,375,000 (how much you’ll need).

# 4: Calculate How Much You’ll Need to Save and Invest Each Month to Meet This Goal

Try the Time Value of Money Calculator to see how much you’ll need to save each month. Go to the monthly payment tab, enter $5,375,000 in future value, $0 in present value, 8 percent annual interest, compound monthly, and forty years. In the output, you’ll see that you need to save and invest $1,540 each month.

It sounds like a lot of money, but if you have a 401(k) at work, use it. It’s a great way to save for retirement. If your company offers a contribution match, your savings goal becomes even easier. And, of course, the less you spend, the more you save.

If you can live off $30,000 (in today’s dollars) and want to retire in ten years, you’ll need $960,000. If you start with $0 today, you’ll need to save and invest $5,247 each month.

Prepare for Changes

Remember that these are just estimates. Your retirement savings target probably won’t be accurate. The stock market rises and falls, and we don’t know how much inflation will be year by year.

This is just a guide. Life happens, so be prepared to change and adapt.

By creating a path to retirement and working toward this goal today, you’ll be better off when it’s time to stop working and enjoy your later years. It’s not as far away as you think. Starting now and investing a monthly amount can get you where you need to go.

Retirement may seem far off, but it’s never too early to start planning. The more you save and make sacrifices now, the better off you’ll be when you finally decide to stop working. Depending on how much you save, you may not be that old.

And that’s something to look forward to.

For more advice on planning for retirement, you can find You’re Making Other People Rich on Amazon.


About the Author

Ryan Sterling is the founder and head wealth coach at Future You Wealth. He has over 15 years of experience helping individuals and families achieve their financial goals in addition to teaching financial literacy courses in underserved communities. He has a BA in economics from Carleton College, an MBA with a specialization in investment management from Vanderbilt University, and is a CFA Charterholder. When not working or writing for the Future You Wealth Blog, you can find Ryan running along the Hudson River, playing basketball, or hanging out in lower Manhattan with his amazing wife Lauren, and energetic pup, Cali.