Have you ever thought about how life would be after you retire? Retirement is when you are done with working. After more than 30 years of toiling hard, you would like to spend the remainder of your life in comfort. Relaxing, enjoying precious time with family, traveling, and doing things you couldn’t do because of work pressures is what most people aspire to do after retirement. All this requires money. How can you get the income needed to enjoy you retired life? The answer is through your savings.
Saving for retirement ensures that you save a sufficient sum to take care of all your expenses. The question then is how much do you need to retire? You don’t have to retire at 58 or 62. You can even retire when you have earned enough to take care of your needs for the rest of your life. So, how much should that amount be? A million or two? Let’s look at how you can decide the money you need to retire.
There are rules that tell you how much money you need to enjoy a comfortable retired life.
- The 80% rule
This is a common rule, which says that you need 80% of the amount you are earning just before retirement. So, if you are earning 100,000 every year just before you retire, you would then need 80,000 every year after you retire. The problem with this rule is you have no idea how much you would be earning at the time you retire. For someone in their 30s, it is difficult to estimate what they would be earning after 25 or 30 years. You can plan for a 5 to 10% salary hike every year and work out an estimate. This is no guarantee that this estimate would be accurate after 25 years. You also need to factor inflation. Prices are rising and will continue to rise in the years to come. The 80% rule can only help you make a very rough estimate of what you need.
- Look at expenses, not income
This rule tells you not to look at the income you earn, but at how much you spend. Most people save around 15 to 25% of what they earn. The remaining money is what they spend. You can keep this as a basis for your calculation. Look at what you are spending. Is there anything you can cut back on when you retire? Based on this, make a list of your expenses post-retirement. You need to factor more expenses for healthcare. You also need to factor for inflation. Once you work out the expenses, you will get an idea of how much you need to lead a comfortable retired life.
A thumb rule to follow is to calculate your expenses as on date and multiply it by 25. This will give you the amount of money you need to save by the time you retire. If you are spending 40,000 every year, then you need to create an amount of 40,000 x 25 = 1 million. This is the amount of money you need before you retire.
- Generating income from savings – 4% rule
Once you work out how much money you need for your post-retirement expenses, you need to know how to generate that amount. Let’s assume you need 110,000 every year after retirement. Assuming average interest of 4% (a conservative estimate), you need to divide 110,000 by 4% to find out the total savings needed to earn this much. This gives us 2.75 million. This is what you need to save by the time you retire. You can then plan your savings and investments keeping this target in mind.
- Savings vs. investment
Now that you have worked out a ballpark figure of how much money you need, it’s time to start saving. Should you save or invest? Savings is where you may keep your money in a savings deposit in a bank. You would earn around 4% interest on it. Would that be sufficient to generate the kind of money you need for retirement? The answer is a big NO! You need to invest money where you get a higher rate of returns and can thus create wealth. Some of the popular options to create wealth are:
- Retirement account, where a part of your savings is invested in the stock market
- Buying stocks and shares
- Mutual funds
You need to decide how you will invest your money, make a plan, and stick to it.
- Start saving early and be disciplined
Most people start thinking about retirement when they are in their 40s. It may be too late. You need to start saving and investing money from your 20s. The day you start working, set aside at least 15 to 20% of your income for savings. Save money and then invest it wisely. This will help you generate the millions you need to enjoy your retired life.
Use the 15/25/50 rule. Save 15% of your salary every year from the age of 25 and then invest 50% of what you save in the stock market. The balance 50% can be invested in other options including bank deposits, bonds, etc. Sticking to this formula can help you be a disciplined investor. This will help you earn the money you need for retirement.
You can estimate how much you need by following the rules listed here. Start saving money and invest it in a disciplined way. There is no reason why you can’t earn enough money to retire. You may even to able to earn this money in your 50s, so you can retire early.