Mellody Hobson talks more on retirement in today’s segment of “Money Mondays.”
Last week, we talked about a potential retirement crisis for this country. People aren’t saving enough. So that begs the question—How much are you supposed to save?
How much ARE you supposed to save?
Unfortunately, there is not a silver bullet for retirement. There is no “magic number.” Everyone’s formula, so to speak, is dependent on a number of factors like current age, intended retirement age, life expectancy, risk tolerance, inflation and—most of all—health. Generally, the savings target for retirees should be between 80 to 90 percent of your pre-retirement income. Statistics show that a healthy retirement savings nest egg is one for which your annual withdrawal is 6 percent or less.
What does that mean in real dollars a month?
Again, this depends on your current income and the lifestyle you desire in retirement.
Let’s assume you’re 30, you earn $50,000 a year, and you want to retire at age 65. You have zero saved so far. You’re comfortable living on 80% of your pre-retirement pre-tax income when you retire (which is $40,000 per year).
To reach your goal, you’ll need to amass a nest egg of $1,563,000 by the time you retire. That may sound like a lot, but remember: 35 years from now, one and half million dollars will be worth far less than it is today, thanks to inflation. Also, remember, that money needs to last you for a long, long time—my example will take you through age 90.
So how do you reach your goal? If you’re a 30-year-old with $0 saved who wants to live on today’s equivalent of $40,000 per year in retirement, assuming you invest at an 8% rate of return, you’ll need to save 13.1% of your yearly salary, or $545 per month.