How Much Should You Save for Retirement?

Are you wondering how much you should save each month for retirement, particularly if you're 34 years old, have a net worth of 1.15 crores (excluding the family home), and plan to retire by 2042?

The equation for determining your monthly savings for retirement is complex, akin to trying to hit a moving target while blindfolded on a carousel. It requires a deep understanding of your goals and the financial landscape. Let's break it down as much as we can.

Understanding Retirement Goals

The first step is to define your retirement goals. Are you looking to live a luxurious beachside life feasting on mai tais in Hawaii, or do you envision a cozy cabin in the woods closer to home? Your preferences set the stage for how much money you'll need.

No matter your retirement dream, it's crucial to remember that it comes with a steep financial price tag. With life expectancy continuing to rise, your retirement funds need to grow alongside it. Often, a commonly cited rule of thumb is to save 15% of your pre-tax income each month. However, the complexity lies in adjusting this figure to fit your unique financial situation.

Adjusting the Savings Percentage

If you're in your 20s and starting your retirement savings journey, congratulations! Financial planners often recommend saving about 15% of your pre-tax income. This includes any match from your employer's 401k plan. If you're starting later in life, you'll need to increase that percentage to make up for lost compounding time.

A powerful tool to help you figure out your monthly savings amount is an online retirement calculator. These calculators consider your current age, income, savings rate, and expected lifestyle in retirement. They provide a rough monthly savings figure but remember, unforeseen events like job loss, moves, or personal crises can impact your finances.

Following the 50/30/20 Rule

There's a popular financial philosophy known as the 50/30/20 rule. This rule suggests spending:

50% of your income on necessities, 30% on wants, 20% on savings, including retirement contributions.

For example, if you earn 50,000 per year, 20% translates to 10,000 per year. If you start this budget in your 20s, you can leverage the power of compounding interest. According to the rule of 72, investments will double every 7.2 years with a 10% annual rate of return. So if you save 10,000 annually, your retirement savings could grow significantly over time.

However, as you age, you may need to increase your savings percentage. Life is unpredictable, much like the weather in Portland, bringing unexpected challenges that need to be accounted for.

Target Amount and the 4% Rule

To determine a target amount, consider the 4% rule. This rule suggests that you can live off 4% of your portfolio each year without running out of money. If you have a cool million saved at retirement, you can safely retire on 40,000 per year. Essentially, it's like a perpetual rainy trust fund in Portland (PDX).

If you're behind in your savings, don't worry—there's still time to catch up. Work a bit longer, save a bit more, and spend a bit less. For instance, skipping that fourth artisan coffee each week and putting that money into your retirement fund can make a significant difference.

It's recommended to aim for 10-15% of your income into retirement savings. This might seem ambitious, but it's entirely doable with the right strategies. Starting early is crucial because time is the real MVP (most valuable player) when it comes to growing your retirement stash.

Think about your future self having a great life in Portland with well-sorted finances because of the smart moves you made. By focusing on the details now, you can minimize future financial burdens.