Building the Nest Egg: How Much Do I Need to Retire?
“What are you going to do when you retire?” It’s a question you could easily blow off with a shrug 🤷♂ After all, you’ve just gained a foothold in your career and started enjoying a taste of financial freedom. At this stage in your life, the world is your oyster—so why think about getting old? The thing is, how you approach retirement today can determine how financially independent you are when the time comes, regardless of how many decades it’s going to be from now. For one, saving for retirement early can make time your ally, thanks to the magic of compounding interest (investing earlier in your life makes wallets bigger). Any small amount you set aside today for your retirement fund can grow substantially in the long run. To help you get a clearer picture of your retirement plan and just how much you need to retire, consider these approaches.
Picture yourself in retirement
It may not feel like it now, but after years, or even decades, of the daily grind, wouldn’t it be nice to one day achieve financial independence especially in your golden years? By planning—and acting—ahead, you can even find yourself financially secure and comfortable before you reach retirement age, as many do these days. Whatever your timeline is and how you picture your retirement to be all depends on how much you want to have when the time comes.
Look at your spending habits
Look at how you’re spending now. Perhaps you’re a foodie, traveler, concert goer, or enjoy staycationing. These new types spending habits are embodied in millennials and completely in line with Goldman Sach’s investment research, which show that millennials are known to put off big life milestones such as marriage, moving out, owning homes, and having kids. The study finds that the median age for marriage for millennials is 30, while 50 years ago, it was 23. Millennials home buying behavior has also shifted to the average of 45 years old, compared to their parents who started owning houses by the age of 25. Your spending may not follow the traditional spending patterns of your parents and grandparents. The upside to this is you have an opportunity to put in more money into sound investments that allow you to build your retirement nest egg. In order to first understand your own spending habits, you can use apps such as Expense Manager and Mint. These apps can help you track your income and expenses, as well as get you on the road to being financially healthy. Mint ties into your bank account and organizes your spending into categories (like shopping, groceries, bills), as well as giving your budgets and goals. One shorthand to follow is the 50:30:20 rule. This is an effective and widely used budgeting tool wherein 50% of your income goes towards necessities, 30% goes to your wants, and 20% goes to your financial goals. This 20% can be used to pay off your debts, make investments, and save up for your retirement.
When do you plan to retire?
According to a survey conducted by Willis Towers Watson, almost half of American workers expect to work until the age of 70. However, according to the US Census Bureau, the average retirement age is 63. These figures show that not everyone retires at the age they want to, often due to sickness or job loss. Meanwhile, there are also those who work even way past their planned retirement age.
Hence, there’s no magic number for retirement. Your optimal retirement age is different from others because it depends on a variety of factors unique to your situation. It would primarily depend largely on how much you plan to save. You should also consider your pension plan, social security benefits, and health insurance eligibility.
“Too many people rush off to a life of leisure, only to find out that they’re bored,” says Financial Planner Derek Hagen, CFP, CFA. According to him, retiring too early may not be a good idea at all. You may miss your old routine, your network, and that sense of purpose that kept you going through the daily grind.
Just remember: when it comes to social security, your benefit increases 8% higher for each year you delay collecting your benefits until you’re 70 years old.
Calculate your retirement savings
Calculating how much you need for retirement is a good way to figure out just how much you need to set aside to retire comfortably at the age you want. To start computing for your retirement savings, take 75% of your current income for your retirement savings. You can still change the percentage according to your preference and any assumptions you have about the future. Annual Retirement Income = Current Income x 0.75 You should also think about other sources of income by the time you retire. Here’s the calculation: Income from your savings = Annual income needed – Income from other sources Next, determine how long you need that amount of retirement savings; in other words, how long you anticipate that you will live. According to CDC’s National Center for Health Statistics, the average life expectancy of developed countries is 80.3. From this life expectancy average, you can figure out how many years you’ll spend on retirement by estimating your life expectancy and subtracting from it your ideal retirement age. Years in retirement = Life expectancy – Desired retirement age Now, determine how much you need annually: Total retirement fund = Annual income from your savings x Years in retirement You also must factor in the inflation rate (some use 3% for inflation but it is highly debatable). You can use an inflation calculator to help you come up with the exact amount.Let’s look at this sample computation:
|$72,000 x 0.75 = $54,000 (Annual Retirement Income)|
|$54,000 - $12,000 = $42,000 (Income from your savings)|
|85 – 65 = 20 (Years in retirement)|
|$42,000 x 20 years = $840,000|
|$840,000 at 3% inflation for 20 years = $1,517,133.44|
Once you’ve figured out how much you need to last you through your retirement years, you can figure out how much you need to save. Using the above example with our retirement savings calculator, if you need $1,517,133.44 when you retire at 65 and you’re 35 right now, you would need to save $1,556.81 each month.
Making sure you have enough to retire
Now, here comes the hard part—how do you make sure you have enough to retire? The answer, saving and investing, may be easier said than done though. You must make sacrifices and create small adjustments in your everyday expenses, like keeping a tight budget and saving wisely. You can play around with different numbers on our investment calculator to see just how much your money can grow over the years. Smart saving involves planning for uncertainties in life, and when you do, this gives you financial freedom and security. Just be sure not to put all your eggs in one basket. Diversify your investments and have more than one source of income. According to Mary Ellen Garrett, Senior Vice President and Wealth Management Advisor at Merrill Lynch, “Consider your savings as the first bill you have to pay each month.” And even if you have a raise, a tax refund or a holiday bonus, consider them a windfall and put it in a separate savings fund. You’ll be surprised at how much you’ve put aside when the time comes.
How are you doing so far?
To help boost your retirement savings, try these tips: When you’re in your 20’s you should strive to be debt free. This is the best time to repay your student loans and get your savings started. By 30, you should have saved at least the equivalent of your salary. By 40, your savings should be 3x your salary, and by 50, 6x. When you reach 60, your savings should be 8x your salary, and by 67, 10x. By having this savings timetable to follow, you can ensure that you’re not working forever to end up stressed and penniless on your retirement. The key here is not how high your income is, but how high your savings rate is. According to Investment Advisor Brendan Mulloolly, CFP, “Focus on what you can control, automate it, and let your good habits compound on themselves.” He advises putting predetermined amounts for savings, no matter how small they may be—and not to touch a dime until you retire.
You can retire early
Retirement these days doesn’t have to be a traditional, far-off plan. There are people who follow the FIRE movement (Financial independence and retire early) and retire even before they hit 30—and, believe it or not, you can retire young too. Millennials today shun traditional retirement and would prefer financial independence, according to a study conducted by Merrill Edge. Furthermore, 37% of working millennials are saving so they can leave the workforce early. One example is Pauline Paquin, who retired at 29. The founder of financial blog Reach Financial Independence, Paquin had an early start, working on several jobs since she was a teen. This allowed her to graduate from college with $25,000 in savings, which she used to buy her first rental property in cash. “Every time I would save $50, I would tell myself that’s a day I don’t need to work in the future,” she shares. Today, she has three rental properties to support her retirement lifestyle in Guatemala. Another example is J.P Livingston, who worked in finance for 7 years after retiring at 29 with $2.25 million. Livingston is one of the many millennials who amp up their savings game up to 70% by making drastic lifestyle choices, which includes bringing pack lunch to work and avoiding dining out. Meanwhile, Elizabeth Willard Thames, a fundraiser and communications manager for a non-profit for 10 years, retired at 32. Thames and her husband left their careers and moved to the country, where the living expenses are lower. She shares, “Knowing that we were working toward this more fulfilling lifestyle allowed us to let go of the desire to spend money and freed us up to focus only on our highest and best priorities.”
Learning from the pros
Try these tried-and-tested saving strategies suggested by investment advisors and financial experts: The 4% rule in retirement can help you determine just how much you need to withdraw from your retirement fund. You withdraw 4% only on the first year and increase in subsequent years according to inflation, thus allowing you to keep your purchasing power. So, if you have a total of $1 million when you retire, and inflation is at, say, 2%, you would withdraw $40,000 from your nest egg in the first year. Then, $40,800 in the second year, $41,600 the next year, and so on. Following this rule can guarantee that your retirement money will last you for at least 30 years. Another retirement strategy is the 10x rule, which revolves around saving 10x of your salary by the time you reach your desired retirement age. Fidelity Senior VP Ken Hevert explains, “Setting up a savings goal linked to your income can help simplify your planning, and help you determine if you are on track throughout your working life.” Meanwhile, for millennials, the strategy most appealing to them is FIRE, which allows them to make big lifestyle choices and deviate from the traditional to ramp up their savings rates. For example, tiny houses appeal to millennials, who may afford traditional houses but opt for small spaces to live simply and therefore spend less. Choices like these allow many young professionals to retire early.
Retirement is inevitable. Sooner or later, you’re going to grow old and finally end your career. If you’re not prepared financially, then you’re in for a rather disheartening and problematic time as you face old age without a source of income. However, if you have a retirement plan early on and closely follow through tried and tested strategies that suit the retirement life you want, then you’re sure to make the most of the golden years of your life.