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How Much do I Need to Save for Retirement?

Updated on April 2, 2013

Savings Retirement

With continuing advances in medical technology, the average age of mortality has also increased. Many people have a savings retirement plan with a view to living into their seventies but the reality is they may well live for ten or twenty years beyond that. With an extended life expectancy, those same people will be faced with having to downgrade their standard of living by stretching their savings over more years than was planned.

How do you calculate the sort of savings you will need to tide you over and keep you in the lifestyle you have grown to love? As a general guide financial advisors suggest calculating 80% of current earnings as a reasonable amount for savings’ retirement.

Calculate 80% on Current Income

Current Earnings 
80% Per Year 
20 Year Plan 

Keeping all your Eggs in One Basket

When planning your retirement savings strategy it is a good idea to look at more than one option for accumulating funds. Keeping all your eggs in one basket is a risky business.

How Much do I Need?

Along with life expectancy there are other major factors to consider in your calculations. Are you planning to use those years to venture out and travel the world? Do your ambitions include leaving a sizeable inheritance to your children? Is the pension of today still going to be available when you reach retirement age? Will it be at the same rate?

Before you can answer the question, how much do I need, you will have to ask and answer all the above. Grab a notebook and start writing it down. The more you commit to paper, the clearer your plan will become.

Life Expectancy

Whatever age you think you will live to, in terms of your savings’ retirement plan, it is wise to add a few more years. There wouldn’t be many retirees who have reached the golden age of 80 and said, “Gee, I think we put too much money away.” But I have heard many say as they head off on another cruise, "I'm spending the kids' inheritance." The golden rule is, you can never save too much money.

Cruise the Seas in 5 Star Luxury

This is going to cost a lot of money
This is going to cost a lot of money | Source

Travel on a Budget

Catch a bus instead
Catch a bus instead | Source

Travel Plans

If you long for travel to see places throughout the world or even within your own country that you’ve always been too busy to see, the days of retirement is the perfect time. How wonderful. This is your retirement and you have worked hard to get here. But what will it cost to finally be able to realise your dreams? Work out how often you would like to travel and how much of that travel will be five star or on a budget bus.

Children’s Inheritance

How much of your lifetime savings should be left to your children is a personal decision but something that needs to be taken into account when preparing for retirement. If you have plans of leaving your offspring well set up then you may need extra funds or you may be happy gifting them the family home.

Other considerations include eligible pensions, superannuation, tax implications and the effect of inflation on your savings.

Calculate your Savings Retirement Needs

When you first start calculating for your savings' retirement, the easiest method is to look at the figures in today's terms. There will be assumptions to be made down the track, regarding inflation and the real rate of return for savings growth. But all of these additional factors are best taken into account once you have your final estimate.

Investopedia gives a sample calculation based on someone who starts planning and saving for retirement at the age of 40 with a view to retire at the age of 65.

Update your Savings for Retirement

The sooner you start thinking about a savings retirement plan the better off you will be in the long term. Even if you start early in planning for your retirement you will need a yearly review. Update your previous plans and take into account any change in circumstances. You may have received extra money not previously accounted for or there may be additional expenses you hadn’t expected.

Seek Financial Advice

Preparing your Savings’ Retirement fund has many aspects and is not something you want to leave to chance. Seek financial advice from a qualified advisor as early as you can. Solid monetary growth does not come overnight and while retirement age may seem a long way off it happens faster than we realise when we are young and carefree.

Copyright © 2011 Karen Wilton


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    • Karanda profile image

      Karen Wilton 5 years ago from Australia

      Thanks for the vote @theking2020. Off to check out your article now, hope it's a good one.

    • profile image

      theking2020 5 years ago

      Voted awesome, would love to hear feedback on my article.