Many of us have goals for a comfortable retirement, but we don’t really know how much it costs to retire, do we? It is time to get a clear idea of how to save for retirement based on how much you can afford to put aside.
The easiest way to find out how much you must put aside for retirement is to create a table that incorporates all your retirement costs as your starting point. To figure out how much you need in savings when you retire, take your estimated monthly expenses and divide them by 4%. This is roughly the amount required to live comfortably into retirement. For example, if you believe that you will need $40 000 a year to live comfortably, you’ll need $1 million ($50,000 ÷ 0.04) going into retirement. Using a 4% deduction rate (this may vary from person to person depending on the income amount) should allow you to spend that money in roughly 30 years.
The amount of money you decide to put toward your retirement really depends on the kind of lifestyle that you wish to live. Determining the age that you’d like to retire at is very crucial as it determines how many years you must save in order to reach your goal. If you want to retire early, you must consider all your savings options and put a large chunk of your salary into a pension.
Follow the 4% rule that was discussed above, and it will allow you to work out how much savings you need to have at the beginning of your retirement in order to make that income a reality. For example, if a 20-year-old student wants to retire at 55, with a yearly income of $40 000, they will need to save $1 million in 35 years. Although it sounds like a daunting task, this is where time and long-term financial stability is of the essence. Using a simple savings calculator, with a rate of return of 6% on an investment, the student will need to set aside around $650 per month in order to meet their retirement goal. The good thing is that there are many avenues to lower the contributions that they need to make in order to have the same goals. a TFSA or an RRSP would go a long way over the course of 35 years if it is being contributed to regularly.
Read Related Blog: Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP)?
The Bottom Line
Saving for retirement is a lifelong process that will fluctuate up and down depending on your financial decisions and experience throughout your life. You can always revisit your retirement goal and adjust your retirement forecast based on your situation. Retirement planning is never too early to take into consideration, and the best time to start planning is today.