It can be complicated to calculate how much you’ll need to save for retirement. Here is a method that is relatively simple, and will help most people get a general idea of their needs.
Start with assuming that you will live 20 years in retirement, and then modify that number based on your health, family history, and other factors.
Then use a replacement ratio to determine the annual income you will need during your retirement years. Use your current income or the income you expect to have during your peak earning years, and apply a percentage according to the following guidelines.
Simple lifestyle versus current; little-to-no-travel; inexpensive hobbies: 80%
Moderate lifestyle versus current; upgrades to home and car expected; some travel and hobbies planned, but nothing lavish: 90%
Maintain your current lifestyle: 100%
Improved lifestyle versus current; increased travel and hobbies: 110%
If you expect to have remaining debt upon entering retirement, add 5 percent to 10 percent to your replacement ratio depending on the amounts you still owe.
Once you know your replacement ratio, use this calculation:
(current income x replacement ratio) x 20 = your retirement savings goal
For example, if you currently earn $100,000 annually and determined your replacement ratio to be 90 percent:
($100,000 x 0.90) x 20 = $1,800,000
Again, this assumes you’ll spend 20 years in retirement, so adjust accordingly if necessary.
This method is streamlined, and excludes Social Security income as well as explicit inflation assumptions. But it serves to give most people a sense of what their retirement savings goal should be.
This method does not account for families that live well below their means. For example, a dual-income couple may live on one income and save the rest. For these frugal families, it would be better to substitute “living expenses” for “current income” in this calculation.
For information about two other approaches, one more simple and another more complicated, go to this article at US News Personal Finance.
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