Thinking about retirement savings can be so daunting, especially when you are in your early 30s. We all love to remain young, and any thoughts of getting old do not really ring well in our minds. While all that is understandable, it is important to face the reality! You are not growing any younger as the time passes, so you really need to think about your retirement plan.
We understand it can get so overwhelming; that is why we are here for you. Come with us as we impart you with insights on how you can calculate your retirement savings. Fortunately, the steps to figure it out are simple. We will help you figure out how much you will need to save for your retirement by the end of this article.
1. Use your current income. Determines your retirement savings
Why do we think your current income is important in determining your retirement savings? First, you will want to maintain a similar lifestyle when you are old. So if you can have a good life with your current income, it means you can sustain yourself with the same amount in your old age.
Many experts suggest that you can plan for 70 to 80% of your pre-retirement income. 70 to 80% is good because you will cut some expenses at your old age. For instance, you will no longer be saving for your retirement but rather living the moment. Other expenses, such as commuter expenses, clothing, and school fees, will be cut. However, your healthcare cost expenses might increase.
2. Determine your retirement age
The earlier you retire, the more you need to save for your retirement. Your savings will not have sufficient time to grow, hence forcing you to save more. Most countries retirement age is 65 years. But some people will not wait until 65 years to retire. It is therefore advisable to adjust your calculations accordingly based on your retirement age.
3. Estimate how long you will need income during your retirement age
Healthcare across the world has really improved, and people can still leave another 30 to 35 years after retirement. Consider how long your retirement might last. You need sufficient savings that can take you through your lifetime. You will be safe if you plan for 35 to 30 years. In instances where your family members have a history of long life, consider adding it. You don’t want to run out of savings at your old age! It’s better to save more.
4. Estimate your annual spending in retirement
To determine your annual spending during your retirement, there are a number of factors that come into play. First, do you intend to travel? Are your hobbies so costly? Or is your lifestyle simple and relaxed?
This can help you determine how much you will need. Use your current spending as a benchmark, and use the rule either 70% or 80% rule.
5. Inflation will affect your retirement savings, so account appropriately
Inflation often eats into the purchasing power of your money. It implies that what you think is enough today will not be enough in years to come. You can counter this by indexing inflation in your calculations. While we cannot be certain about inflation, you can take a benchmark like 3% to 5%. You can then come up with your inflation-adjusted estimates for your retirement savings.
6. Include Social Security and pensions in your retirement savings
Upon retirement, employers normally give their employees’ pensions. With your pension, you greatly reduce the amount that you need to save for your retirement. If you are able to have a rough estimate of how much you are likely to receive, the better. You then subtract it from your annual needs. Your pension will offset some amounts of savings. For example, if you needed $20000 for your retirement and your pension is giving you $10000, then you will only need to save $10000.
7. Your healthcare cost in retirement matters
Healthcare costs are the biggest consumer of resources at your old age. Your medical needs increase as you grow older. Unfortunately, medical expenses are unpredictable, and they can eat into your savings at once. It is therefore prudent to set aside a different fund for medical purposes.
Fortunately, most medical savings are tax-free, so you can seize that advantage as you plan for your retirement. Having a separate health care fund will safeguard you from dipping into your savings for the same.
Read Also: Healthcare Costs in Retirement and How to Plan Effectively
8. The 4% rule is safe for withdrawals
When withdrawing from your retirement savings account, the 4% rule comes in handy. You see, you need to be sure that you are not exhausting all your savings in a single withdrawal. Secondly, you are giving your savings a chance to grow even as you use them. While not perfect, it’s a safe guideline. This rule can help keep your money growing even as you withdraw from it.
9. Calculate Your Savings Goal
Finally, it’s time to add up everything to find your yearly retirement. Subtract Social Security and pensions. Adjust for inflation and healthcare. The result is the amount you’ll need each year. Multiply this by the years you expect to be retired to get your total retirement savings goal.
10. Start saving early
If you begin saving for your retirement now, you will live to enjoy compound interest benefits. The small amount you are saving now will be a great deal in the near future. Do not wait until you are 40 years to start saving. Start now, and set aside 10% to 15% of your salary for this account. As you get closer to retirement, increase these amounts to be sure that you are meeting your targets.
Final Thoughts
Planning for your retirement gives you a roadmap that guides towards your retirement goals. The right time to do it is now. Don’t wait until it’s too late. You deserve a happy retirement, and you can only achieve it if you plan as early as now.
