Retirement - the most expensive thing you’ll ever do
How much money do you need to retire? This is one of the most difficult questions in all of financial planning. Countless words are written, endless fees are charged, and plenty of sleep is lost, just trying to answer it!
But I’ll tell you a secret—a truth we’re afraid to admit in financial services. We don’t know how much you need to retire! Why? Because, in addition to predicting a host of smaller factors, computing how much you need to retire requires pinning down two huge and essentially unknowable variables: the length of your life, and the real return on your investments. (That’s the actual return, after inflation.)
So why even bother; you may be asking? Well, because you might live until you’re 100 years old and you certainly don’t want to spend that time in poverty. So, what should one do?
I recommend setting aside at least 15% of your income as soon as possible, and ideally more like 20%, of your income if you want to achieve an adequate retirement income, which it defined as 75% of your income throughout your working life. 20% may sound excessive but it’s not. It may not even be enough depending on when you start (but more on that later). Why? Because we’re living longer. That’s a proven fact not an opinion. Your biggest risk is longevity.
Global life expectancy for both sexes increased from 65.3 years in 1990 to 71.5 years in 2013, and women made slightly greater gains than men. Female life expectancy at birth increased by 6.6 years and male life expectancy by 5.8 years. If trends seen over the past 23 years hold, by 2030 global female life expectancy will be 85.3 years and male life expectancy will be 78.1 years.
You need to save more from earlier or hope to win the lotto. It’s a simple concept that only demands discipline and time from you. I must stress that this traditional approach to retirement savings is one you’ll want to apply if you will be or have been saving for a long time, beginning in your twenties or early thirties. In general, saving 15% of your income from a young stage should give you enough to live well in retirement. The most significant benefit of this method is that it keeps you from worrying about hitting a specific mark. Just set this money aside over the years and let it grow in a low-cost fund.
For the late-comers
If you didn’t begin investing for your retirement in your twenties or early thirties, a good rule of thumb is aiming to have saved 17 times your final annual pre-tax salary by age 65. Breaking that down per decade, a suggested timeline to use to get to that magic number is: -
Another way of approaching the problem is by trying to answer, what percentage of my income should I be investing towards my retirement at what age? My suggestion is as follows: -
Figuring out how much you’ll need to retire is much more about hitting your individual goal than an arbitrary number that fits for everyone. If you want to live it up in retirement, traveling around the globe and eating lavishly, you’ll obviously want to have a goal on the higher end. There are a lot of “what ifs” when it comes to retirement, but you can still prepare by taking some basic guided steps.