How much money do I need for retirement anyway?
This can be a tricky question with a lot of what-ifs attached to the answer. However, what we know for sure is that having a successful retirement experience requires attention, preparation and planning. As Benjamin Franklin famously stated, “If you fail to plan, you are planning to fail.”
Retirement planning is not something that one plans to fail at, but unfortunately many do not know where to start. In fact, according to a 2019 Northwestern Mutual study, roughly 56% of people do not know how much they need to save for a comfortable retirement. I say that if over half of the population does not know how much money they need for a comfortable retirement, then they likely do not know if the savings plan, they have in place will get them there.
The 50 – 30 – 20 Budgeting Rule
The 50 – 30 -20 Budgeting Rule helps us understand how much we should be saving. It allocates your after-tax income into three categories: Needs, Wants, & Savings. The thought being to keep your spending of each category at the proper percentage of take-home pay and you will be on your way to an appropriate savings plan. If you are already hitting that 20% savings number, then great job! Keep up the good work. You will likely meet your long-term goals sooner than most.
Needs = 50%
Your needs should include everything necessary for survival: shelter, food, transportation, health care, utilities, childcare, minimum debt repayments, etc.
Wants = 30%
Wants are what make life enjoyable: dinners out, entertainment, cable/internet, beauty care, vacations, etc. We understand having wants but we recommend focusing more on experiences rather than on the accumulation of things.
Savings = 20%
Savings is considered as any retirement, investment & savings accounts. We would also recognize debt repayments over and above minimum payments as savings as well.
This rule will give guideposts for those just getting started and it will provide some insight to areas where cuts can be made if you are just shy of meeting your savings goals on an annual basis.
The 4% Rule
Now that we have an idea of how to create a budget to fit our situation, lets look at what we can expect that savings plan to do for us in retirement. The 4% Rule is a conservative guideline used to calculate how much a retired person should plan to withdraw from their portfolio in the first year of retirement. In the following years, the amount for withdrawal is adjusted for inflation. Following this assumption allows a steady stream of income to supplement social security and seeks to keep the account principal intact.
Below is a chart that your future retired self will thank you for studying. I’ve provided hypothetical investment account values and applied the 4% Rule to get the annual income expectations. Additionally, I’ve provided conservative calculations on the monthly savings needed to reach those goals. These assumptions are based on saving the same amount each month/year and earning a 6% rate of return.
|Retire at 65||Monthly Savings|
|4% Rule Annual Income||Age 30||Age 40||Age 50|
This chart should be used as an example on how to set goals for your retirement savings and help you see the value of starting early. This chart is not a guarantee or recommendation.
For a more detailed financial plan specific to your situation, give us a call. We are happy to assist you with understanding your unique retirement planning needs and help define a path to meeting your long-term goals.
Shaunna M. Anderson, CDFA®