Saving for retirement is tough. For one thing, there's no way to know exactly how much you'll need to save. All you can do is make your best guess based on your situation and goals.
Traditionally, financial planners and retirement calculators suggest you'll need 70 percent (or 80 percent or 100 percent) of your pre-retirement income to maintain your current lifestyle. This doesn't make much sense.
Say, for instance, you earn $80,000 a year but spend $70,000. If you based your retirement needs on your income (70 percent of $80,000 is $56,000), you'd fall short of supporting your current lifestyle. But if you earn $80,000 a year and spend only $35,000, basing your retirement goals on your income might lead you to save too much, meaning you could have used that money to enjoy life when you were younger.
How Much Should You Save?
Instead of basing your retirement needs on your income, base them on your spending patterns. Your spending reflects your lifestyle; your income doesn't. But how much should you save?
According to the Employee Benefit Research Institute's 2010 Retirement Confidence Survey, 49 percent of retirees spend less in retirement than before (23 percent spend much less) and 37 percent spend about the same. Only13 percent spend more in retirement--and of those, 6 percent say their expenses are only "a little higher."
Sure, you will need a sizeable nest egg for retirement--especially if you plan to travel or play golf every day. But don't be snookered by the constant refrain that you need to save 70 percent of your pre-retirement income to retire well.
There are hundreds of retirement calculators across the web, and each is a little different. No one calculator is necessarily better than any other, but these are especially handy:
- The T. Rowe Price calculator bases its results on your spending, not income.
- The Motley Fool has two useful calculators. One estimates your retirement expenses and the other lets you see if you're saving enough.
- Choose to Save's ballpark estimate tool can be used online or off. (But its numbers are based on income, not expenses.)
- FireCalc.com may seem overwhelming at first, but it'll give you an idea of how safe (or risky) your retirement plan is based on how it would have fared in every market condition since 1871.
Looking at the results from one calculator isn't very useful. But by comparing numbers from several, you'll get an idea of how much to save for the retirement you want. If you're lucky, you may even have enough to spend your mornings on the golf course.