How Much to Save for Retirement

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Studies show that 48% of Americans have no retirement savings. Since $0 is not enough, how much actually is? There isn’t a specific answer here. There are specific concepts to adopt for saving though. The major one is the discipline to follow through with a strategy.

Today, we are going to discuss how to save up for retirement. Let’s get started!

Calculating Your Retirement Horizon

What is a retirement horizon? A retirement horizon is the number of years you have until you plan on retiring. Here is an example. If you are 45 and you want to retire at 65, that is 20 years. 20 years is the retirement horizon.

Don’t listen to the people that say you need to have a certain amount of money saved by a certain age. In fact, you can retire in any timeline. It just depends on how much you can save over a certain amount of time. That is where your retirement horizon comes into play.

Figure this out, and then you can start figuring out a savings plan for this.

Savings Rate and Retirement Horizon Relationship

Your savings rate is the amount of money you save from your income. You put this money towards savings, investments, and debt repayment. The more you save and invest, the faster you’ll create a cash flow due to passive income.  

You will then either invest money from your paycheck or from the passive income. Once you figure out where your retirement savings is going to come from, this is where the retirement horizon you chose comes into play.

Here is an example of how much you’ll need to save to reach certain goals. Keep in mind that compounding takes place over time. The longer you spend investing in a retirement fund, the less money you’ll have to invest monthly. 

Retirement Horizon10 Years20 Years30 Years40 Years
$500,000$2,734$849$336$144
$1 Million$5,467$1,698$671$287
$2 Million$10,934$3,396$1,342$574
$3 Million$16,401$5,094$2,014$861

As you can see, the compounding really does make a difference in the amount you will need to put in.

How Much Do You Actually Need?

This is the number one question you need to ask yourself. You need to have a target number. The way to do this is by working backward. How much do you plan to spend yearly? 

Don’t base this off of your current income. This number can change depending on where you are living. If you decide to move to a different country, you could live like a king for $2,000 a month,

Once you have an ideal place and target number in mind, it’s time to start doing some math. Here is an example of how. Let’s say your target is $24,000 dollars. You will be getting social security. Currently, social security is around $1,500 a month. That is ¾  of the way there.

How are you going to come up with the rest you may be asking? Well, that’s where your investments or passive income will come into play. It should cover the rest and more. You should be living comfortably.

Safe Withdrawal Rates 

  This is also known as the 4% Rule. It answers the question of how you can spend yearly from your nest egg before you die. The goal here is to be able to only spend 4% yearly until you die. It depends on when you retire. It could be 30 years or it could be 50. It honestly depends on how long you intend to work till. Some people work until they are 75.

Your goal here is to make your money last. 5% is the max. 4% is ideal. 3.5% is your primary target. This will preserve your nest egg as long as you live. The reason is that your nest egg is compounding faster than you are taking money out. This brings us to our next topic.

Calculating Your Nest Egg

Now that you have chosen your withdrawal rate, you can now calculate your nest egg. This is the easy part.

Let us say your goal to spend yearly is going to be $12,000 a year. That is 4% of your investment withdrawal. Your multiplier is calculated as 100 divided by your withdrawal rate. 100 / 4 is 25. $12,000 multiplied by 25. So to survive your nest egg will need to be $300,000 dollars.

Toy around with that formula. This will give you the specific number needed to offset your social security. This will then give you the number needed so that you can live comfortably wherever you are.

How to Reach Your Retirement Target Faster

Now that we have gone over how to figure out how much you will need, let’s go over ways to help you reach that target number as soon as possible.

Tax-Sheltered Accounts – We all know how much the government likes taking taxes. I believe the average household pays around $14,000. I mean it’s obvious the less you pay in taxes the more money you can put toward your nest egg. So to save money on taxes, invest in a 401k plan through your work or through a broker. If you invest through your work, your paycheck will be less, but less money means less taxes taken out. 

Employer Matching – Some companies offer this option through investments. If you buy stock or increase the investment through your 401k, they will match what you purchased. It’s kind of a sweet deal. Free money is the best kind!

Lifestyle Inflation – This is a huge thing to keep in mind. I am not sure what your mindset is. When people get a raise or get more money, they want to spend the extra income. They go out and get a new place, a new car, or in turn spend money on things they shouldn’t. Don’t fall into that trap. Spend that extra money investing or putting it into your nest egg fund. You have survived this long and are probably living decently. You want to focus on the future, not on the present.

House Hack – This is a good way to save money. If you buy a property to live in, you can try and buy a duplex or multi-family home. If you rent it, you could cover your mortgage. You can get a roommate to cut your expenses in half. If you are out of town and live in a happening place, you can Airbnb your place. Or if you have a spare bedroom you can still do the same thing if you don’t mind strangers. Regardless it’s a great way to have extra money for saving and investing.

Automate Your Savings and Investments – I don’t know about you, but having to put money in your savings account is hard. The mental issue of having to put away money is hard. Because you see it come and go. The mental state of losing money that you can use is hard to deal with. There is a phrase that is popular that rings true. Out of sight out of mind. If you never had it in the first place it’s less painful of a task. So ask your employer to transfer some of your paychecks to your savings account. You can also do the same with investments. Your employer can automatically deduct money from your paychecks to be put in your 401k. There are also brokerage apps that you can automatically pay into stocks and bonds.

Diversify Your Investments – This is mandatory. If you have all your money wrapped up in stocks, and the market tanks you are in trouble. That’s why 401k’s are great. It spreads your money through different markets. If you are using a brokerage firm, spread your money around. Invest in ETFs, Bonds, Stocks, and if you are feeling adventurous you can get involved in the currency exchange market.

Side Hustle – Extra money is always a good thing. It can be used to help you or for saving and investments. These are perfect post-retirement gigs. You can turn a hobby into profit. If you are a good fisherman, give tours. If you like video games, stream on twitch. If you are crafty do tutorials on youtube. If you like to drive and like people drive for Uber and Lyft. Extra income is an extra income. 

So there you go. You have learned the basics of how to set up a game plan for retirement. You also have learned ways on how to save money to invest in your savings. Grab a pen and paper and start working some numbers around. It’s better to do it now, then later. Remember we won’t live forever. Go ahead and get started. ‘Till next time.