Wednesday, February 17, 2010

Retirement Savings: How much should we save?

What are we saving for? How much should we save for retirement? I've been reading some articles about retirement and how we should plan now.

So before we go into how much you want to save, we first have to ask ourself: What do you want to do with your life?

Answering this question will help answer "How much annual income you want?" and answering that question will help answer "How much should I save for retirement?"

According to this article in Wise Bread the 4% rule should be sufficient to help us ride out any major storms including stock market drops, inflation, lack of social security, etc.

For example if we are spending about $4k/month or about $48k/year currently and would like to maintain this lifestyle we would need to save the annual amount divided by 4%.

$48,000/year / 0.04 = $1.2 million.

Here's what Wise Bread says about your retirement once you reach your goal:

There are too many variables for it to be safe to put any of these things entirely on autopilot. When you figure the inflation adjustment for next year's spending, cross check to see if you're spending more than 4% of your capital. (If the market hasn't kept up with inflation, you probably will be.) If that's true, you'd be well advised to cut your spending a bit--a few bad years, especially early in retirement, can put a portfolio into a hopeless downward spiral if you go on spending without regard to how much money is really there.

If you can earn some money in retirement, even a pretty modest amount, that can take a big weight off the investment portfolio. Well worth trying, even if just for a few years early on.

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