How much do I Need to Retire?
The world is at a precipice; workforce globally notices this trend where the baby boomer generation is now close to retiring and the millennial generation enters the workforce. As this generation shift takes place, a serious discussion becomes necessary about how much one needs to retire.
The world changed much in the last few decades, the economic realities faced by the workforce a couple of decades ago adopted new economic challenges. The 2008 financial crash became a turning point for the global economy when you look at the way how our financial system crashed.
On one hand, the economic crash exposed serious financial loopholes in the system, laws and regulations passed subsequently to correct the mistakes and cover up the loopholes. It shaped the world economy in the last decade. The post-financial crash world noticed a rise in deficit spending, global debt now stands over $350 trillion approximately. Almost every major world economy became highly geared on debt.
One can even say that the aftershocks of the previous financial crash have not allowed the world economy to recover organically, and since then governments and central banks use debt to support the local economies.
What does this mean for the everyday person, though? We realised that the 2008 financial crash wiped out almost 20% of the retirement savings if another crash occurs will the same happen again? Probably yes. Therefore millennials who have just entered the workforce need to think about their retirement right from the onset of their careers.
1. Start Saving for Retirement Early in Your Career.
If you plan about your retirement right from the beginning of your career, you receive much more flexibility in your savings regime. You can invest your savings into short- and long-term plans to give you the best rate of return possible. But before you can do that, you first need to get an estimate idea of the retirement funds you need.
2. Get a Rough Retirement Estimate.
This depends on how much time you have left as an active member of the workforce. If you just started your career, you still have time to plan your retirement funds and what you need to live comfortably. Say you have a decade or less left, it allows you more time to plan properly for your retirement.
When you are young, your spending pattern is different. When you become older, your spending pattern changes for various reasons. Some observations made mentioned that the spending pattern in the last 10 years of active employment is almost the same after retirement.
You will need to consider these things while calculating how much you need for your retirement. So if you are into the last decade of your employment, then you must have a clear idea about your spending patterns and upcoming expenditures. Figure out your monthly and then annual expenditures.
Once you figure out your annual expenditure, you will know how much you spend in a single year. This figure presents more or less the same figure after you retire, so now you have to extrapolate this over 30-35 years. It gives you an estimate of how much you need to retire.
If however you just started your career or are a few years into it, then you need to consider a few things. Your retirement calculations may change every few years because as you age, your expenditure styles will change.
If you are single, then in future you are likely to get married or take on a partner or have children, and this will affect your lifestyle and expenditures. You may be healthy, but that is no guarantee as it changes as you become older. Usually, people develop medical conditions as they age and certain conditions require ongoing treatment, which can affect the expenditure patterns.
You need to keep these factors in mind while calculating how much you need for retirement and this means that almost every 3-5 years you have to recalculate this figure based on your lifestyle. This figure, however, gives you a rough estimate that you can work towards.
3. Use an Online Retirement Calculator.
A person can do an estimate with ease through online retirement calculators. There are plenty of websites that offer this service, you just need to plug in a few figures and you receive an estimate of the amount you need to retire. One needs to show care when using these calculators. They develop them using algorithms, and one size, in this case, does not fit all. For example, many retirement calculators assume that you are healthy and with few medical expenses.
Most countries have their retirement age around the age of 63-67 and this means that by the time you retire, a person saved over 30-35 years time period. This means that if you aim to make a strategy for retirement savings, you need to consider two factors, namely:
- Cash inflows
- Savings rate
Let us look at a worked example for a better understanding here. If a person has a post-tax income of $8000 and a savings rate of 30% then the person saves around $28,800 per annum. If the individual has 30 years left in retirement, then assuming that the income remains fixed, the person saves almost $864,000 in 30 years.
According to recent research by Schwab retirement plan services, most 401(K) plan owners typically need around $1.7 million to retire. Well, $864,000 is no way close to this mark, but we have not accounted for the effect of investment yet.
There is no point in saving money and letting it sit idle. Savings need investments into profitable options to create exponential returns. After taking in the effect of investment returns and an increase in income over time, one can save up to $1.7 million.
4. Figure out Your Withdrawal Rate.
The next and final step is to figure out your withdrawal rate. Withdrawal rate refers to the amount that you need to upkeep your savings once you retire. Most people spend their retirement with 80% withdrawal rate of the last 10 years of their employment.
For example, if your average monthly expenditure for the last 10 years of employment is $5000 then you can according to the 80% rule, spend roughly $4500 per month on average after retirement. This takes up your annual expenditure to $54000.
Once you have calculated these figures, you can easily work out how much you will need to retire safely. If you are young, then it is better to carry out this calculation once every few years. This calculation may take some time, but it gives you a very good estimate of how much you need to save, to retire and spend your retirement in comfort.
In conclusion, while you need to save around $1.7 million to $2 million for your retirement, ideally start from the outset of your career. There is no point in waiting for a few years before you save for retirement. The earlier you establish a savings approach, the easier it becomes to save up a considerable amount. It helps you spend your retirement with ease and comfort.