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Financial Health

How Much Should You Save For Retirement?


1. Estimate future income needs

This step involves the most work — but power through, because the others are a breeze. And if you keep even a loose budget, you already have an advantage. Projecting future income requirements starts by taking a look at current spending.

Enter your typical monthly expenses in the first column of a spreadsheet or jot them on a piece of paper. Then do a little thinking about whether each expense will stay the same, go down, go up, or even disappear in retirement. In a second column, write your best guess of what each expense will be in retirement.

Add those up and also add on other things you may not budget for now but want to spend money on later, you will have a rough idea of your monthly spending needs in the future. Multiply by 12 to get the income you’ll need each year to meet those expenses in retirement. Compare that to your current income to arrive at what’s called a replacement ratio.

2. Consider common rules of thumb

According to the 2021 Employee Benefit Research Institute’s retirement confidence survey, 7 in 10 workers are confident they will have enough money to live comfortably in retirement, but 1 in 3 workers say the COVID-19 pandemic has negatively impacted their ability to save for retirement. If you need to adjust your retirement plan because of a job loss or other financial burden, it may be a good idea to keep some financial rules of thumb in mind.

The one used most often is the 80% rule, which says you should aim to replace 80% of your preretirement income. This is a loose rule: Some people suggest skewing toward 70%; some think it’s better to aim for a more conservative 90%.

To figure out where you land, consider what percentage of your income you’re saving for retirement. If you’re saving 15% now, you could easily live on 85% of your income without adjusting expenses. Add in Social Security, cut payroll taxes — which take about 7.65% of your income while you’re working — and you most likely can adjust that income down even further.

3. Use a retirement calculator

If your estimates are correct, a good retirement calculator will give you an assessment of where you stand in your savings progress, by combining those annual spending estimates with projections. Most thorough calculators bake in assumptions that are based on research: There will be defaults for inflation projections, life expectancy, and market returns.

To get the most accurate result, you should consider whether those assumptions are correct given your situation: Is your investment strategy poised to hit the default return used by a calculator, which will probably hover around 6% or 7%? If you’re skewing toward bonds, you’re going to want to adjust that down.

4. Revisit regularly

Circumstances change and your retirement needs will change with them. Whether it’s a new job, a new baby, or a new passion to travel the world once you hit 64, it makes sense to perform these retirement calculations fairly often. It’s always better to adjust as you go, rather than struggle to catch up down the road.

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