Many people are worried about a coming retirement crisis. There is a concern that Social Security will need to cut back on payments, and with fewer companies offering pension plans, some folks may be forced to live an exceptionally frugal existence in their golden years. Those who are young are lucky. They have time to build up a nice nest egg. Those who are older will have to save more each month to build up their savings for retirement.
Think About $1,000 A Month
There is a rule that’s known as the 4% Rule. This rule argues that you should have your nest egg—roughly made up of 50% stocks and 50% bonds—last for 30 years as long as you withdraw no more than 4% each year. This includes an annual adjustment for inflation. The concept behind the $1,000 per month idea is very similar. This rule argues that for every $240,000 you can save in your nest egg, you can take out $1,000 per month.
The withdrawal rate is 5% in this instance, so it assumes that a retiree leaves the workforce at a normal retirement age of at least 62 years of age. If you can save $480,000, you’d have a retirement fund that pays $2,000 per month. The amount you can take out would go up or down based upon the amount in your account in this example.
What Percentage To Save?
This is a personal decision you’ll need to make. Many personal finance professionals have long told people they need to save 10% of their incomes. This might work as long as you start saving 10% each month as soon as you start working and then keep it up religiously for your entire working life. However, most people will have occasional bouts of unemployment or periods in which they make less. This will lead to the necessity to take out a bit of your retirement nest egg.
If you’re getting started later than age 25, you’ll probably want to build up to a higher savings rate. If you’re 30 or 35, 15% of your income might work. If you wait until age 40 or about, you might need to save 20% or 30% of your income to meet the recommendation of having a nest egg that provides 80% of your working income. The earlier you start, the better off you’ll be, and the less you’ll need to save out of every paycheck.