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Saving towards your retirement is optional, but when you think about the impact it has on your future, it’s extremely important. One thing is certain for all of us: there will come a day when you won’t be able to work, and you need to have a plan in action. For many of us, saving for retirement is one of those pains now that brings a long-term return, like 40 years plus. In the end, you’ll be glad you did it. But how much do you need to retire comfortably?
How to gauge what you’ll need for retirement
Saving for retirement might not seem like an immediate concern, especially when you’re still young, but it’s one that we all need to consider. The earlier we do so, the better. However, one of the hurdles you’ll need to overcome while planning for retirement is gauging how much money you’ll need to retire comfortably. There are a few things to consider here:
- The standard of living you would like to have upon retirement
- Potential assets you may have
Before we explain how to calculate your ideal retirement amount, let’s consider these components quickly. First off, consider the standard of living you would like to maintain. Are you frugal with your money, or do you prefer to spend whenever you like? Remember, your retirement fund needs to last you for decades if all goes well, so you’ll need to factor in if your savings are sufficient for your future lifestyle.
Secondly, it’s difficult to work with what you don’t have yet, but try to think about some assets you would like to have obtained by retirement, be it a house, a few flats that generate rental income, etc. While this might not happen, it’s helpful to plan.
The Association of Superannuation Funds of Australia Retirement Standards recommends that if single people want to retire comfortably, they would need around $595,000 in retirement savings. In comparison, couples would need around $100,000 more. This works out to a yearly savings of about $50,000 to $70,000 yearly. If you plan to live more modestly, these amounts would be less. If you want to know more about calculating your retirement, get more information from a retirement planning expert.
Key factors that’ll influence how much you need
Retirement planning is largely based on estimations and is often influenced by several extrinsic factors, for instance:
When you want to retire
There are a lot of calculations that go into deciding how much you need to put away for retirement. For example, once you’ve chosen a retirement age and the basic amount is worked out based on your preferences, how much you need to put away every month for the next few decades would be calculated in order to help you achieve your retirement goal. In general, most people retire at 65. But you could retire sooner if you would like to; you would just need to put more away every month to compensate for the years you’re technically missing.
Your current age
Your current age is also going to influence your retirement quite substantially. Remember, retirement funds use compounding interest annually which exponentially increases your funds the longer they stay in the account. This means that if you start your fund at the age of 20 and only take it out in 45 years when you retire, it’ll be significantly bigger in regards to the interest percentages. On the other hand, if you only put money in for 15 years, you would need to deposit in larger amounts, most likely to achieve a suitable retirement amount.
Your current salary
One of the major limitations people have when it comes to putting money into a retirement fund is their salary. For many of us, putting 40-50% of our income into retirement isn’t practical as we often need that much to live on and grow our immediate wealth. In addition to planning how you would like to live in retirement and putting money away accordingly, you would also need to consider what you can afford to put away. On average, try to put away 15-20% of your income into a retirement account each month.
What set withdrawal amount would you be comfortable withdrawing from your retirement?
When you set your retirement age and amount, you’ll also need to set the amount you withdraw from it every month if you’re going to take a salary from it. In general, 4% is considered a safe withdrawal rate for retirees. However, this amount can be higher or lower depending on your preferences.
Inflation
Lastly, consider inflation. Every year, the prices of goods and services fluctuate, mostly going up. This means that the cost of living will increase, and the worth of your currency might be greatly diminished over the next 40 years or so. So, you would need to work out the cost of living for your ideal lifestyle in retirement and then calculate what inflation would be in 40 years.
Final Thoughts
Whether you want to retire comfortably and be able to spend money on what you like or you just need enough to survive during retirement, the earlier you start, the more you will end up with.
Reviewed and edited by Albert Fang.
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Article Title: How Much Money Do You Need to Retire?
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