So, Do You Have $500,000?

There are a lot of people who wonder how much they need to save for retirement.  Chances are, what you need to save is more than you’re saving right now. 

Think of it this way.  If you have $500,000 saved when you hit age 65 and start drawing it out, you’ll be able to take out about $25,000 per year, at most.  Take out more, and you’re likely to be around longer than your savings.  Now, $25,000 a year isn’t going to let you live in grand style, in fact, even with Social Security added in, you’re probably looking at a frugal lifestyle.  Still, many people think of $500,000 as an unattainable goal.

Retirement Planning Examples

One way to look at what you need to save is to simplify your thinking.  Say you’re 25 years old, you want to retire at 65, and you have a life expectancy of 85.  That means you want to work for the next 40 years, but have your income last for the next 60 years.  The way you’d have to do that is to save 1/3 of your income for the first 40 years, so you’d have enough for the last 20.  If you decide you’ll postpone retirement until 70, you’ll work 45 years, and still need your income to last 60 years, so you’d have to save ¼ of what you earn.

Now, these are simplified examples.  They don’t take into account interest on what you save, or increases in your salary, but they also don’t take inflation into account either, and they assume you did the right thing back when you were 25 (don’t we all wish).  So, even more complicated projections will show that saving 15% is the least anyone can save, starting at age 25, if you want a comfortable retirement.  If you save less, you’ll have one of two options: learn to live on less income than you had before you retired, or retire (maybe a lot) later.

There are a lot of people who wonder how much they need to save for retirement.  Chances are, what you need to save is more than you’re saving right now.