Starting in the 1990s (the era of CDs, Super Nintendo, Super Soakers, and dial-up internet), companies began shifting away from pension plans to salary deferral retirement plans, such as 401(k). This was a seismic shift in the investment mindset. Before it was working for a company for 30+ years and skating into retirement knowing you had guaranteed income from your pension and social security. Nowadays, pension plans are more rare than seeing a fax machine (good luck explaining that to kids). Employees are in charge of putting money away, picking where to invest it, and deciding on when you have enough to retire.
So how much is enough?
I hate to answer a question with questions but first you need to know a bunch of things. How many years do you have until retirement? How long do you expect to live? What growth rate can you reasonably expect? How much do you expect to spend in retirement? Will social security be around?
Think this sounds like a lot? Welcome to the world of financial planning! Where the future is unknown and the past doesn’t matter (kind of). We use the data that is at our disposal to come up with the best estimate knowing that the future will likely be different and we will likely have to change it multiple times as your goals and the market changes.
Now that we have that out of the way, there are a few core principles that can help with answering these questions.
1. The earlier you start, the less you may have to save
Rule 1 of taking advantage of compound interest is that the longer time frame you have, the less you will have to invest (assuming comparable earnings rates). I think we have all seen these charts but I posted one at the top of this post. If you start early and invest a reasonable amount of money, it will pay off more than if you were to invest a considerable amount more in the future. Above, we start at age 22 and invest $27,000 over the course of 10 years and have a 10% rate of return, we end up with over $1 million by the time we are 67. If you start at age 33 instead of 22 and invest a similar amount per year but continue on until you are 67, you only end up with $820,000. The big difference is that you would have invested $105,000 compared to the $27,000.
In case you just glossed over all that, start early.
2. Estimate your retirement needs
This one is difficult, especially if you are young. You need to guess how much you think you will need to pay for expenses in retirement. In my experience, most senior citizens don’t do a whole lot. Most of them live pretty modest lives. You need to gauge for yourself depending on how much you enjoy travel, expensive hobbies, or constantly giving you grandchildren anything they want (looking at you mom). You likely won’t have a mortgage but will likely have a car payment because not many people want to fix cars in their golden years.
Got your number? Great. Now estimate how much you are likely to have in social security or other income, like a pension. You can run your personal social security report at ssa.gov. Then multiply that number by 25. The Lansing, MI area I live in has a low cost of living. My personal estimate is to have $80,000 per year in retirement income. If social security is still around, I would estimate I will be getting $27,000 per year in social security leaving me with a need of $53,000 per year in income need. I multiply this by 25 (this is how we get to the 4% withdrawal rate) to get my retirement nest egg goal of $1,325,000. Wow. Not a small sum of money.
3. Start with your retirement date and work your way back
Continuing along on our journey, we need to figure out when we want to retire. For many folks, between 60 and 65 is a normal retirement age. Let’s just say my goal is 62 so I can start pulling social security. Unless you have a DeLorean, you can’t do anything about the past so our starting point is where we are at. I liked being 30. I was married, no kids, a house, good income and plenty of free time. So that is my dream, I mean, starting point.
I have 32 years to grow a nest egg of $1,325,000. By using a retirement calculator like this one, (Side note, I really like this calculator, The rates of return are much more realistic and factor inflation in.) I figure out I need to save $1,000 per month ($12,000 per year) to reach my goal by 62.
4. Review your growth schedule to see the milestones you should be hitting.
Here is the breakdown by year for the example we just went over. By having a chart like this it is easy to see how much I need to have by age to ensure I am “on track.” This is especially helpful if you miss your goal some years and are trying to play catch-up.
| Age | Total Retirement Value | Yearly Contribution |
| 30 | $ – | $ 12,000 |
| 31 | $ 12,000 | $ 12,000 |
| 32 | $ 24,840 | $ 12,000 |
| 33 | $ 38,579 | $ 12,000 |
| 34 | $ 53,279 | $ 12,000 |
| 35 | $ 69,009 | $ 12,000 |
| 36 | $ 85,839 | $ 12,000 |
| 37 | $ 103,848 | $ 12,000 |
| 38 | $ 123,118 | $ 12,000 |
| 39 | $ 143,736 | $ 12,000 |
| 40 | $ 165,797 | $ 12,000 |
| 41 | $ 189,403 | $ 12,000 |
| 42 | $ 214,661 | $ 12,000 |
| 43 | $ 241,688 | $ 12,000 |
| 44 | $ 270,606 | $ 12,000 |
| 45 | $ 301,548 | $ 12,000 |
| 46 | $ 334,657 | $ 12,000 |
| 47 | $ 370,083 | $ 12,000 |
| 48 | $ 407,988 | $ 12,000 |
| 49 | $ 448,548 | $ 12,000 |
| 50 | $ 491,946 | $ 12,000 |
| 51 | $ 538,382 | $ 12,000 |
| 52 | $ 588,069 | $ 12,000 |
| 53 | $ 641,234 | $ 12,000 |
| 54 | $ 698,120 | $ 12,000 |
| 55 | $ 758,988 | $ 12,000 |
| 56 | $ 824,118 | $ 12,000 |
| 57 | $ 893,806 | $ 12,000 |
| 58 | $ 968,372 | $ 12,000 |
| 59 | $ 1,048,158 | $ 12,000 |
| 60 | $ 1,133,529 | $ 12,000 |
| 61 | $ 1,224,876 | $ 12,000 |
| 62 | $ 1,322,618 | $ 12,000 |
5. You want a simple answer? Target to invest 10-15% of your income
Is all of this math just confusing you? No problem. The short answer is to shoot for between 10-15% of your income going towards your retirement. Individual needs will vary but this is an attainable goal you can strive for if you are young. If you are older, it will likely depend if you are on track or need to make up ground. Consult with a financial advisor to get a more specific answer.
6. Don’t wait.
There is always going to be a reason to not put away money into retirement accounts. That is the easy route. Buying stuff now only pushes out your chances of retirement at a decent age. The behavior of saving is a bigger factor than how much you are saving. Start with whatever you are comfortable with, even if it is $20 a month. Stick with that until you are comfortable enough to increase it to $50. Rinse and repeat until you are on pace to hit your goal. Keep tabs on your progress and initiate that feedback loop to keep yourself motivated. It is simple but not easy.
