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Calculating How Much You'll Need To Save For Retirement

If you're like most people, you'll wait too long to start thinking about preparing financially for retirement, and once you do think about it, you'll greatly underestimate how much you'll need to save. The amount people will need for their retirement, and the portion of their income they'll have to set aside in order to reach that savings goal, are typically quite a bit higher than they realize when they just go by what "feels" right. It's necessary to sit down and really crunch the numbers as best you can, and not guess or ignore the issue.

It's understandable in tough economic times that some people feel they aren't in a position to focus on their long term future. When you're out of a job, or you're worried about how you're going to scrape together enough money to keep up with your mortgage payments so you don't lose your house, saving for retirement may have to be put on hold.

On the other hand, much of the time we tell ourselves we just can't spare any more money to set aside for retirement because we need it for today, that's really not the case. If we truly realized the importance of safeguarding our future, we'd treat putting sufficient money aside the same way we treat any other necessity, and we'd find a way to cut corners somewhere else in our budget instead of there.

Some people like to set aside 10% of their take home pay for their retirement. It's a nice round number, easy to remember, and it's low enough that in most circumstances you can probably handle it without feeling too deprived. But is it enough?

There cannot be a general answer to that question, because every case is different. Based on all the relevant factors in your case, 10% might be overkill, or it might be insufficient.

The factors in question that you should take into account include such matters as:

* Your age.

* How much money you already have set aside for retirement.

* Your desired retirement age.

* Your estimated income from now until that retirement age.

* How much money you will need each year of retirement in order to live at the level you desire.

* How many years you estimate you'll live after you retire.

* Your estimated rate of return on invested funds between now and your retirement.

* Your estimate of how much income you'll have after retirement (Social Security, pension, any part time work, etc.).

Of course estimates are only estimates; you're not going to know exactly what most of these figures are. But think it through carefully and do the best you can.

When estimating how much money you'll need in retirement, for instance, take into account such matters as whether your mortgage will be paid off and you'll be free of one of the biggest expenses you have today. Or how coming under the Medicare program instead of paying for health insurance as you do now will affect your expenses.

The easiest way to then crunch all these numbers and ascertain how much money you should take out of each paycheck for your retirement is to use one of the many handy retirement calculators you can find online. Here are three examples:

* Choose to Save * CNN * Kiplinger

The best thing to do is try more than one, and see which works most intuitively for you. Then play around with some of the figures. For example, what if your income were a little less than you're anticipating? What if you made a little better or a little worse rate of return on your investments?

By coming up with the most accurate estimates you can and entering them into one of these tools, you should be able to ascertain reasonably well how much you need to be setting aside for your retirement.

Don't put it off. The sooner you start saving at the correct pace for retirement, the better off you'll be.

Sources:

Michelle Singletary, "Do You Know How Much to Save for Retirement." The Washington Post. Walter Updegrave, "Retirement: How Much to Save." CNN Money.