Frequently I’m asked by folks how much they need to be socking away for retirement. Many people I talk to are concerned about having enough (a very common concern I would say among most people) for retirement and fear running out of money.
As much as I would love to give them a rock-solid answer and as much as they want a definitive answer, the true answer is that it depends – on a number of factors.
1. How much do you plan to spend in retirement?
This question can be difficult to answer especially if you’re young and can’t contemplate nor even come close to an estimate of what expenses will be in retirement. For others, this may be more readily a number to come up with especially if one is close to retirement or in the peak accumulation years of their careers which is usually later in life.
2. How much do you plan to give in retirement?
For many folks there is a desire to give away some or all of their wealth at retirement. This could range from a few thousand to several billion dollars (we’re talking Warren Buffett wealth here). Naturally, the amount saved and accumulated over the working years needs to be greater than simply an amount needed to survive or enjoy retirement.
3. What assets have you currently saved and accumulated?
If you’re younger you’re not looking at much, but here’s the good news: time is on your side. You have much longer until retirement but you also have the advantage of compounding returns as well as the potential of your human capital (your earnings over your lifetime) compounding as you advance in your career. If you’re middle aged or older aged, there’s a chance you have a home you may potentially downsize from or perhaps you’d consider a HECM reverse mortgage. As you age, you have less human capital the closer you get to retirement, but hopefully that’s been replaced with financial capital (what you’ve saved while working).
4. How much do you plan on earning over your lifetime?
This is the $64,000 question – although I will say be careful with thinking that more money means more savings. Just by the numbers if a person makes more they have the ability to save more, but it’s true that the more someone makes the more they spend. I have seen very simple, frugal folks that turn out to be the millionaires next door and I have seen dual six-figure spouses live paycheck to paycheck and worry. A key point is this – when you start saving – save a percentage and as you get raises, continue to live like you did when you had nothing. It’s amazing how fast your wealth will build.
Next week we’ll cover some different equations (for all you math lovers – you know who you are!) that show some examples but for now – a good rule of thumb is to start with 10% of your gross income (what you make before taxes) and gradually move toward 20%. In theory as you make more you should be able to easily save more – especially if you’re expenses stay as they were before your income increased. Good in theory, but hard for many folks to do.
