How Much Money Do You Need to Set for Retirement?

How Much Money Do You Need to Set for Retirement?

Retirement planning is not just about stashing away a random sum of money every month. A key to successful retirement planning knows the answer to “How much money do you need to live off through retirement?”

It is the question that everyone puts up to a financial counsellor, but it is not very simple to answer. The size of a retirement cushion may vary by individual as it hinges on your current income and the lifestyle you want in the twilight years. Knowing how much money you need to save is the first step to beginning the retirement planning.

How much money do you need to lay aside for retirement?

Many financial experts suggest that you should be living off 80% of your pre-retirement annual income. For instance, you need at least £80,000 per year to live comfortably during retirement if your pre-retirement annual income is £100,000.

  • Implement the 4% rule

You cannot estimate the actual amount you will need to live off during retirement, but the 4% rule will help you. To determine how small amount you will need for your retirement, you need to know the desired annual retirement income and then divide it by 4%.

For instance, a person with earnings worth £80,000 will need a retirement nest egg worth 2 million pounds (80,000/.04). This rule is applicable only when you are expecting that you will live for 30 years during the retirement.

  • How much do you need to save by age?

If the 4% saving rule does not apply to your case, you should consider saving money by age. Assuming that a long time to go to retire, so you do not need to worry about saving is just foolishness. Remember that your expenses will go up as you age. Not only will you be under the pressure of mortgage or car payments, but you will also see rising medical bills. In addition, you could also be on other debts like loans without a guarantor. Therefore, you should start saving money as soon as possible.

Financial experts say that the ideal age for starting to save money for retirement is 20. However, it does not mean you can start saving money because you are 30 years old or over. You can start stashing away money for your retirement even at the age of 40 or 50, but the contribution will be much more significant to achieve your goal by the time you retire.

A rule of thumb says that you should save at least 15% of your income for retirement when you are 20 years old. This includes savings across all retirement accounts. Below is the table that shows how much money you should have saved by the time you turn the following ages:

Age Annual Salary
30 1 X annual salary
35 2 X annual salary
40 3 X annual salary
45 4 X annual salary
50 5 X annual salary
55 6 X annual salary
60 7 X annual salary
65 8 X annual salary

This retirement plan will work when you do not have any additional liabilities like debt payments, medical bills etc. It is assumed that you will be on the job throughout the time. Your actual ability to save money can be affected by some unexpected life events, such as job loss.

How realistic these methods are?

It is all but impossible to know the exact amount of money you need for your retirement life. In fact, assuming that you have stashed away sufficient funds for your retirement life is totally absurd. Do not forget that the present value of money keeps declining.

You will have to invest money so as to cause it to grow. Investments will undoubtedly let you reap some benefits, but they are subject to risks as well. You may lose your money if the market does not work as per your expectations. If you cannot save money as per the 4% saving rule, you should simply try to save 15% of your total annual income every year.

However, it depends on how much amount you are earning. If you hardly cover your monthly expenses from your earnings, you will not be able to put in 15% of your income. Well, you can set aside a lower amount of money until you start earning a good amount of money.

It can be 2%, 5%, 7% or 10%. Just save no matter how much you are saving every month. Try to invest this money, so you keep growing its size. Investing is crucial to growing your money as it helps prevent it from losing its present value.

How to save money for retirement?

Here are some tips to help you create a retirement fund:

  • Resolute to start today

First off, you need to start saving for your retirement life today. Having said before, people generally do not begin bothering about their retirement funds until they turn to 30s, but they forget that expenses will rise as you age. The older you are, the harder it will be to save the desired money by the time you retire. Therefore, you should make a firm decision that you will start saving money today.

Even if you have just started earning money, you should make some contribution toward it. No matter how old you are now, it is never too late to start stowing away money for retirement. In order to determine how much you can lay aside each month, you need to create a budget. Analyse how much money you need every month to cover your expenses, including savings for unexpected expenses and then see whether you are able to save some of your earnings that you can put away.

Check if there is a wiggle room in your budget. By cutting back on your expenses, you will be able to save more money.

  • Set up an automatic contribution

Open a savings account separately for your retirement, and try not to dip into it. Link this account to your payment account and enable the auto-transfer feature.

Set a particular limit you want to save every month and allow your bank to pull those funds from your pay account every month. This will help keep growing your retirement savings account.

  • Track your saving goals

Tracking is a must to ensure that you are meeting your saving goals. It is not always possible to consistently be able to transfer the same amount of money. Unexpected expenses can crop up.

You will, of course, dip into these funds. If you decide to take out personal loans for bad credit in the UK in order to avoid dipping into funds, you may have to cut off the contribution until the debt settlement.

The bottom line

A rule of thumb says that you should focus on saving money for retirement instead of finding how much you would need at that time. It all depends on the lifestyle you will pursue during the twilight years.

Try to save at least 15% of your monthly income. However, it is not necessary that you cannot stash away money less than it – after all, it depends on your current income.

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