One of the most difficult questions to answer in relation to retirement savings is how much money is enough, especially when one considers the risks involved in investing. Realistically, individuals need to think more about how much they can invest than how much they should invest. The two numbers may be radically different depending on personal situations.
People who consider saving for retirement important should make it a priority and enshrine it within their budgets. The first step is to get a sense of how much people will need in retirement and what that would look like in terms of monthly savings now, even if that number is not immediately feasible. Another approach is to ask how much the amount currently being saved will amount to in the future.
Some individuals figure out how much they must contribute now in order to live as they would like during retirement and translate that into their current investments. Whatever is left after making that deposit is how much individuals have to live on here and now. Of course, this strategy can leave individuals struggling to make ends meet.
Investors still face the question of how to determine the amount they will need in retirement. This is not an easy question to answer, but it is an important one. People who arbitrarily choose to save a certain amount for retirement each month may be in for a surprise when they get close to 65 and realize how little they actually have to live on after retiring.
Several free online calculators exist that can make the math much simpler. Individuals choose an investment strategy (from conservative to aggressive) and indicate how much they are currently saving to see what the monthly retirement income will be.
Thinking about How Much Money Is Really Needed during Retirement
Still, there is the question of how much monthly income is enough during retirement. Certainly, it is quite difficult for individuals to imagine how much they will need to achieve their goals. A good strategy when it comes to this question is to start broad and then get more specific over time. As individuals get closer to retirement, they will have a better sense of what they will need. When just starting to save, people can generalize much more.
Some financial professionals recommend that individuals set a goal of getting their take-home, after-taxes pay today. However, it is also important to adjust for inflation, which can be up to three percent per year, so it is best to round up rather than down. Once retirement is within 10 years, then it is time to get more specific with the numbers.
Budgets often change radically once individuals retire. Some expenses, such as transportation to work, will fall away, while new ones will arise. For example, individuals may need a travel budget for visiting grandchildren.
Individuals also need to think about longevity. In other words, it is not enough to ask how much they need each month. People also need to think about how long they will need the income. Average life expectancy now is about 90 years for men and 92 years for women.
However, current health concerns and familial patterns also need to be factored in. Some people will live significantly longer than that. Getting caught off guard can have undesirable consequences.
The Process of Finding the Right Balance in Retirement Savings
Once individuals have a rough idea of how much they need to save today using the strategies mentioned above and online calculators, then it is time to start thinking about how much can realistically get stashed away. While it can prove painful to increase savings and thus decrease spending money, individuals should also think about the benefits of saving.
The government, as well as many employers, incentivize saving for retirement. Employer retirement plan contributions are made before taxes. Depending on your tax bracket, putting $6,000 away for retirement in a year may only shrink your take-home income by about $4,500. When employers match contributions, that is basically an increase to salary, albeit a benefit that will not be seen until years down the road. Typically, individuals should save at least up to the employer match.
Most people worry that they are not saving enough for retirement, but there is also the risk of saving too much. Giving up today’s financial goals for the future is not always a wise decision. For example, prioritizing retirement savings over a down payment for a home does not always make sense. Individuals need to take stock of their goals and think about what they want for themselves both now and in the future.
Finding the right balance takes time and requires periodic reevaluation, so individuals should look at it as an ongoing process rather than a one-time assessment. Ultimately, saving for retirement is not all-or-nothing. Individuals can put away money for the future while also saving for a mortgage down payment, but they may not achieve the numbers they were hoping for as quickly as they would like. Sometimes, this is okay. Other times, individuals need to think about what is more important to them.