How Much Money Should You Save For Retirement? Now that tax season is behind us for another year and people have made those last minute contributions to their retirement accounts, I thought it would be a good time to look at how much money you should save for retirement. This question can be a little tricky and no, I’m not gonna offer up a bunch of retirement calculators.
From a financial perspective, retirement requires a long term plan. Further complicating matters is that this long term plan will be unique to each person’s financial situation. Most personal finance experts will say that it depends on our lifestyle and how much money we spend. It also has to do with some very important assumptions that we build into our retirement plan. Things like whether or not you’ll have a mortgage or if you plan on traveling a lot can significantly impact the quality of your retirement.
The truth is that there is no magic number of how much each of us needs to save to retire. There are, however, some general rules of thumb that can help us get a sense of how much we need to be saving. Here are 3 perspectives on the matter:
William Bernstein wrote in his book If You Can that young people should save 15% of their income throughout their working lives. His assumption was that people could reasonably expect to achieve a 5% real return after things like inflation and fees. Bernstein’s approach accounted for the fact that high quality defined-benefit pension plans are fast becoming extinct and that young people will either have no pension or a lower quality defined-contribution plan.
The Wealthy Barber says to save 10% of your income in addition to your retirement savings and your workplace pension plan. So now we’re at about 20% of your gross income. The idea is that if you save that much throughout your working life (25-30 years) then you will be in a very strong financial situation and will be able to have a comfortable working life and retirement.
It goes without saying though that the more money you save up front, the sooner you’ll achieve financial freedom. For example, Derek Foster comes to mind. He is the author of Stop Working, Here’s How You Can! In case you’re unfamiliar with him, he has the distinction of being Canada’s “youngest retiree” who retired at the age of 34 after a decade in the workforce. His approach involved a frugal lifestyle and saving as much as 70% of his income.
I must admit that I tend to lean more towards Forster”s approach. While I’m not as extreme a saver as he was, my approach to saving for retirement has always been to save the maximum amount possible early on in life so your money can get the maximum benefit from compounding.
My advice to people is to go big and scale down afterwards. It’s a lot easier to contribute less to your savings because you have saved too much, than it is to be forced to save more down the road. After all, I’ve never heard anyone say that they wished they hadn’t saved so much! Usually it’s the other way around.
What do you guys think about these approaches? Are you good with saving 15%-20% or are you on the accelerated plan with Foster?
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