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How to save and invest money for retirement

Updated on August 28, 2012

Saving for retirement is absolutely necessary for each and every individual. When you pass a certain age, you may not have the similar enthusiasm or stamina to work in the same manner as while being young. At this time, you will think about the future expenses and may have to depend on your children after few years. So, if you do not want to completely depend on your children, start saving for your retirement now.

Have you ever thought about what the monthly expenses are going to be after 20 years from now? If you will follow the similar lifestyle and consider same inflation for the next 20 years, your expenses will be at least three times if not more. So, if you have never thought of saving for retirement, you must give it a second thought and start planning to save and invest money for your better retirement life.

Source

Download Retirement Planning Calculator to know exactly how much monthly expenses would be there at the time of retirement.

After calculating the retirement expenses, you will be amazed and may also worry at the same time about saving money even for one year post retirement expenses. So, it is always advisable to start investing for retirement as early as possible. If you will start investing early, you will get better returns and see the actual benefits of compounding. Money grows multi-fold with time.

How much money to save for retirement

You must save money for retirement right from the time you start earning. When you start saving from the initial stages of your career, you almost get around 30 years to save for retirement. Initially, you may start saving money by putting aside only 5% of your monthly salary for retirement. But as your salary increases, you must increase this percentage to as high as 25%.

How much money you need for retirement

The amount of money required for retirement depends on the individual’s expenses. Suppose, if someone does not have any home loan or other EMIs, he/she may not need the same amount as the one having several loans. First, you must calculate your monthly expenses post-retirement and start saving to have enough cash to easily live for at least 5 years. Suppose your monthly expenses are coming out to be $20,000 then you must have at least $1,200,000 at the time of retirement. If you can save more money, it will be great to target for 10 years of expenses and invest to get $2,400,000 for your post retirement life.

Current Expenses ($)
Years for Retirement
Inflation (%)
Post Retirement Expenses ($)
Minimum Retirement Fund ($)
5,500
25
8
20,000
1,200,000
5,500 includes 2,500 as inflationary expenses and 3,000 as non-inflationary expenses. To create a robust retirement fund, you must start saving as early as possible.

Learn how to invest for retirement

When you know how much money to keep aside for retirement, you have several options to invest that money. You can open a recurring deposit account; invest in Provident Fund; invest in 401(k) or Roth 401(k), if you have that option available. You can also invest in some ‘Retirement savings plans’; alternatively you can start a SIP (Systematic Invest Plan) of Mutual Funds, which can provide you better returns than traditional savings plans.

Whatever investment option you choose, always make a habit to analyze your retirement portfolio after every few months or at lease twice a year and make necessary adjustments. You can also invest some lump sump amount as a Fixed Deposit (Certificate of Deposits) whenever you get some extra money from other sources and increase you retirement portfolio.

Points to remember while planning for retirement

  • Calculate monthly expenses at the time of retirement
  • Prepare yourself accordingly
  • Start saving from today
  • Start by at least 5% monthly salary and increase gradually up to 25%
  • Invest in 401(k); Mutual Funds; or any other long term investment instrument
  • Enjoy retirement life

If you start preparing for your retirement at the right age, you will certainly enjoy your retirement life and will not see it as a burden for you and your family.

Comments

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    • anujagarwal profile imageAUTHOR

      Anuj Agarwal 

      7 years ago from Noida

      In India, we have more than 8% inflation especially in metro cities; it goes as high as 15-20%. Thanks for dropping by.

    • travelespresso profile image

      travelespresso 

      7 years ago from Somewhere in this exciting world.

      Interesting calculations but I think your inflation figure seems very high especially over the long term.

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