How much you should save for retirement sometimes receives the absolute answer: 10 percent of take-home pay. There are also calculators for estimating this. They are available from Bankrate, MoneyChimp, and FireCal.
However, with so much economic volatility, those kinds of responses to the question of “How much?” are just not cutting it with those of you concerned about your retirement.
For example, you know that it’s possible to lose that “good job” before retirement age and not be able to find a comparable one. That changes everything. Also, it is impossible to predict long-term return on investments, rate of inflation, and government tax policies.
Added to those economic uncertainties are, of course, the personal ones. How long will you live? According to the World Health Organization (WHO), the average U.S. lifespan is 78.3 years. That means you might live much longer. Also, catastrophes, such as incapacitating illnesses and accidents, requiring expensive nursing-home care, never were predicable.
However, what is known is that it is necessary to save for retirement. Income from Social Security and any company pensions will likely not be adequate. Already, you are observing a growing number of “retired” Baby Boomers doing minimum-wage jobs just to make ends meet. Yet, according to the Retirement Confidence Survey from the Employee Benefit Research Institute, 60 percent of workers have less than $25,000 saved, in addition to any equity left in their homes after the crash of the real estate sector.
Experience is showing that maintaining your current lifestyle demands that 70 percent of your present income is how much you should save for retirement. That can be reduced through strategies such as relocation to a lower-cost location. For instance, a move from the New York Metro area to southern Arizona could downsize housing costs at least 50 percent, car insurance another 50 percent, and gasoline about 60 cents less a gallon. Also continuing to work at paid employment or owning a business adds income to Social Security and pensions. Still, a nest egg will be needed. Remember, there could come a time when you are no longer able to work. So you cannot count on that.
How to create and grow that nest egg? There is no ambiguity about that. You establish wealth for your retirement through regular contributions to employers’ or self-employed retirement plans, Individual Retirement Plans, age-appropriate risk-taking in investing, automatic deductions from checking account to bank savings accounts and money market funds, incremental income from part-time jobs and side businesses, and selling what is no longer needed.
The size of that nest egg and the speed at which that accumulates primarily depend on how people of all generations approach personal finance. A key best practice is establishing a budget and having a commitment to stay within it. Certainly there will be emergencies. But those end and then it is a return to that discipline of budgeting. Another best practice is to downsize fixed expenses. That might entail buying a smaller house or acquiring roommates who are not relatives to defray the cost. A top-of-the-line car not only incurs a high monthly loan payment, but also expensive insurance.
How much you should save for retirement, as an individual or as part of a couple, really depends on your vision for your quality of life, feelings about continuing to work, and what it takes to bring you financial peace of mind.