How much do I (you) need to save for retirement?

It’s a tricky question, but a popular one. Let me share my thoughts on it for a moment.

In my mind, an ideal “retirement” situation (and/or even an ideal target “wealth” situation) would be for someone to have enough investments that generate enough returns to match their current salary. So if you make $50,000 per year now, having investments that grow at least $50k/year, IMO, would be rather wealthy and acceptable for retirement.

Many people, and retirement calculators, estimate how long someone will live and work that into the calculations. Technically you can draw down the investment balance and spend principle rather than just growth. The trick there is timing – if that’s your plan you don’t want to draw down too quickly or you could run out of money. Personally, I think that’s fine, but I also think it would be an *awesome* goal to not have to draw down the investment balance and just live off the returns – leaving the balance to your heirs.

Let’s step back and look at some math. I’m not code-savvy enough to actually put a working calculator on this page, but I have an Excel spreadsheet that I’ve created that accepts a few values and then returns some results. So let’s play with some numbers based on some assumptions.

Current age: 22
Target retirement age: 50 (hey, let’s be wealthy young enough to enjoy it! :>)
Current income: $50,000
Estimated average investment returns: 8%
Current savings/investments: $5,000
Expected inflation rate: 1%

Based on those numbers, you have 28 years to retirement at which point you’ll want $66,065/year in salary (inflation adjusted). Based on an 8% return you’ll need at least $825,807 worth of investments. To reach that amount in the time given (28 years) and the rate estimated (8%) you’d need to save 17% of your income or about $717/month. That sounds like a decent chunk of change but not impossible – how bad do you want to retire at age 50? :)

Okay, let’s say you just LOVE working and plan to work until age 67. With everything else being the same you’d need to save just 5% of your income, or about $210/month. Certainly that $7/day is reasonable for many people.

Let’s pretend that you’re fairly optimistic about the stock market and accept Dave Ramsey’s thoughts on estimated returns based on historical data shows we can estimate 12%.

With that one change the “retire at 50” scenario above would only require saving 6% of income, or about $240/month. In the “retire at 67” scenario you’d only need to save 1% of income, or about $40/month (yeah, really).

I’m pretty solidly comfortable personally assuming 8%. It’s fun to look at the numbers based on higher returns, but I tend to think conservative and would rather be pleasantly surprised at retirement with an “excess” (much more than I need) of investment returns/income. It would be a lot of fun to take the extra returns and pump them into some well-deserving non-profits or other philanthropic ventures.

Really though, more than the rate, the age at which you start saving makes a HUGE difference. Back on our 8% and 67 retirement age example: If you want until age 30 to start the saving/investing, you no longer need $210/month but rather $368/month – a whopping 75% increase in the necessary monthly savings. If you wait a long time to get started, it’s hard to catch up. It really is. So start now, and explain compound interest and growth to your kids and encourage them to start as soon as they have a job – no matter how small. Money saved from a paper route over 50 years has tremendous growth potential.

Now go look at your budget and start planning for your retirement today.