Last week I gave some general indications on how much someone needed to save. We used general percents and some basic numbers but this week I want to actually put those numbers to work.
For example – let’s say we have a 30 year old couple that says they would like to have $3,000,000 saved at retirement (assume their both the same age and will both retire at 65). We’ll also assume that they have not started saving yet. Using a 5% compounded annual rate of return this couple would need to save about $2,640 per month for 35 years in order to hit their goal. If we assume they’ve amassed $50,000 by age 30, then they only need to save $2,388 per month. If we use the $2,388 as our savings made at 10% that means our annual income for the couple is about $286,560.
Using the same amount needed at retirement of $3,000,000 let’s take a couple that wants to retire at 65 but waits until age 45 to start saving. With only 20 years to save at 5% interest they need to slam a whopping $6,968 per month to reach $3,000,000! Obviously the 10% rule of thumb is not going to get them close to their goal – unless they’re earning $836,160 annually. In this case they would need to save much more than 10% of their income to hit their goals.
Naturally we can argue that in both cases if their rate of return is higher they can either save less or will have more for retirement.
One of the biggest takeaways from this exercise is it shows the value of compounding and saving early. The earlier we start saving the more advantage we can take of compounding. The other advantage is that we can use different rates of return. Higher rates mean more money in the end or less one has to save while lower rates mean either less money at the end or more we have to save. The numbers can be used no matter what monetary goal one has at retirement.
How do we save more? Take full advantage of your employer sponsored plan such as a 401(k), 403(b), SIMPLE, SEP, 457. In addition, start contributing or continue to contribute the maximum to your IRA. And pay yourself first – make your retirement savings the first bill you pay every month and then live off the rest. This may seem difficult at first, but it boils down to spending less than what you earn.
Looking to hit the ground running? Consider saving all of your tax refund.
The post How Much Do I Need to Save: Part II appeared first on Getting Your Financial Ducks In A Row.
