Many people guess blindly at how much money they’ll need in retirement. Though it can be tricky to come up with an accurate number, especially when retirement is many years away, you can use your current income as a guideline for how much to save. While there are always exceptions, generally speaking, you’ll be in pretty good shape if you put away 10% to 20% of your income for retirement, but inflation, return on investment, and Social Security should also be part of the equation.
How much retirement income will you need?
Rather than come up with a magic number — say, $1 million — as a retirement savings target, many workers instead will establish goals based on a percentage of replacement income. Say your annual household income is $200,000. You might aim for 80% replacement income, which means you’ll need $160,000 per year in retirement.
Now if you’re willing to live a frugal lifestyle, you might get away with less — say, 70% or even 60% replacement income. On the flip side, if you’re hoping to spend your retirement traveling extensively, you may need to aim for 100% replacement income.
The age at which you retire will also play a role in how much savings you’ll need to amass. Given that seniors are living longer these days (the Social Security Administration estimates that one in four 65-year-olds will live past 90), the earlier you retire, the more of a strain you’ll put on your savings. On the other hand, if you’re willing to work into your late 60s or early 70s, you’ll stretch your savings considerably by shortening your retirement.
Inflation and return on investment
The money you save for retirement may or may not hold up over time depending on where inflation takes us. While you can’t necessarily predict how inflation will erode your purchasing power over time, you can take steps to combat it by investing your money wisely.
Consider this: The average annual inflation rate is 3.22%, but we don’t know whether that number will drop or increase over time. What we do know, however, is that putting most of…