How Much Do You Need to Save for Retirement?

This blog post is just to show the amount of money that we should be saving for our retirement. Most of this would just be some of the numbers that I have calculated to show the amount that we should be saving to ensure that we will be able to build up a sufficient nest egg for our retirement. If you want to learn more about saving up for retirement, you can read my post on it here: Ways to Begin Saving for Retirement

(Image source: http://www.bankingsense.com/how-saving-slowly-over-time-builds-your-retirement-portfolio/)

What percentage of our salary should we be saving for our retirement? Assuming that we are able to earn a 7% rate of return on our investments (before retirement), have no salary growth (for simplicity) and  start working at 25, we would need to save .........

20% of our salary to retire at 65

42.3% of our salary to retire at 55

97.6% of our salary to retire at 45

This is if we are looking at a 2.5% rate of return after retirement, about the SGS 10-year bond rate, which would require 40 times your annual income to support our current salary. If we decreased our rate of return before retirement to say, 5%, we would need to save........

33.1% of our salary to retire at 65

60.2% of our salary to retire at 55

>100% of our salary to retire at 45

And if we used the 4% rule of thumb, where we have a 4% withdrawal rate on our retirement fund (our return may be higher than this, but this is a commonly used number), with a 7% rate of return on our investments before retirement, have no salary growth and start working at 25 as well, we would need to save........

12.5% of our salary to retire at 65

26.5% of our salary to retire at 55

61% of our salary to retire at 45

And when we go back to the 5% rate of return before retirement example, we would need to save........

20.7% of our salary to retire at 65

37.6% of our salary to retire at 55

75.6% of our salary to retire at 45

Delaying our retirement would not only give us more time to save more, but would also give our investments more time to grow, requiring a lower contribution rate. We can also see that the rate of return on our investments is very important to our retirement as a 2 percentage point decrease will require us to devote almost 10% more of our salary to fund our retirement (in examples above)

Just a useful tool in judging our retirement adequacy was done by JP Morgan Chase:

(Image source: https://www.jpmorganfunds.com/cm/Satellite?UserFriendlyURL=gtrbrowseslides&pagename=jpmfVanityWrapper)

To use this guide, just take your current salary and age and reference it to the multiplier on the table. So for example, if you're 30 and making $75,000 a year, you should have saved 0.5*$75,000 = $37,500. But then, the model assumptions have to be taken into account (and followed subsequently) if we intend to follow this as a guide to our retirement. (Just to note, this method will not generate sufficient passive income to match your salary and will deplete your fund as you go on, hence the 30 years in retirement part or in other words until you are 95)

If you would like to read more on whether you should be investing in dividend stocks for your retirement, you can read my thoughts at Thoughts on Investing for Dividend Yields

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