Budget tips

How much need I save for retirement

The first step in this process is to decide on the standard of living you are aiming for in retirement. The next step is to estimate the cost of this standard of living. The standard of living you aim for is something only you can decide however it remains to be seen if that is realistically achievable. This process will assess the realism of your aim.

Let us assume you need an income of $500 per week in retirement to maintain your desired standard of living. Let us also assume that you will be retiring in 30 years. We can work out how is needed in investments to produce an annual income of $26,000 in 30 years time however we must also assume an investment rate of return.

I will assume a rate of return of 5% per year on investments. The long term rate of return on the stock exchange investments has averaged around 6 to 7% per year but I am being conservative. We can calculate that we will need $520,000 in principal to generate an annual return of $26,000 at 5% returns. We can then go on to calculate how much must be saved every week to reach $520,000 over the course of 30 years assuming all income is reinvested. The amount to be saved is $151 per week or $7,830 per year. The amount to be saved each week should be regarded as a guide as you might not actually achieve the expected returns over time.

Such calculations illustrate the power of compounding interest. It takes ten years to reach an investment income of $4,300 per year. After 20 years the investment income is $12,000 a year. After 30 years it is $26,000 a year. The sooner one starts the easier it is accumulate the nest egg for retirement.

The last step is to figure if one can actually save the required amount every week. If one can not then the options are

  1. find a way to increase income
  2. find a way to reduce expenses
  3. reduce expectations for retirement

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