Retirement Investing - How Much Should You Save? - Part 2

Papabear — Wed, 18 Oct 2006 05:07:39 +0000

Here’s Part 2 of our 3 Part series on determining how much you need to save each month to have the money you need for the kind of retirement lifestyle you want.

Step 3 - Determine how much you need to save. Let’s say you currently earn $86,000 per year and have determined you can live on 70% of that or $60,000. To determine the amount of money you need in your retirement savings account by the time you retire, calculate how much it would take to earn $60,000 a year in interest at 8%. The math is simple. $60,000/8 x 100 = $750,000. Next determine how much you will have to save over the years between now and the age you plan to retire to reach your $750,000 goal.

If you don’t have a financial calculator handy, you can go to one on the website of the good folks at FinAid.org. Just click on the handy calculator at www.finaid.org. This particular calculator says it was designed to calculate how much money to save for college, but you can use it to calculate how much you need to save for any financial goal. For the sake of this example, I plugged in $750,000 as the goal and 25 years left before retirement and 8% return. In this situation, it says we would need to save $783 per month. That’s a hefty sum. Let’s see if there are ways to reduce that monthly savings amount.

Step 4 - Adjust for company or other retirement or pension plan payments. You need to adjust the amount you will have to save each month by taking into consideration any retirement or company pension plan payments you may be entitled to. Fewer and fewer companies are offering a defined benefit plan, where you are guaranteed a certain monthly payment. However many still do, usually tied to your number of years of service.

Let’s assume for this example that you qualify to receive 1.2% of your final salary, and that you will be on the job for 30 years when you retire. That’s 1.2% x 30 x $86,000 = $30,960 per year. That means you will have to cover the difference between $60,000 and $30,960 or $29,040 yourself. Applying the same math at 8%, that’s $29,040/8 x 100 = $363,000. Using the calculator on FinAid.org, that’s $379 a month in savings to reach that goal in 25 years.

Tomorrow in Part 3, we will look at adjusting for Social Security and inflation.

defined benefit plan