How To Assess Your Monthly Savings Target for Retirement

Most financial advisors recommend starting to save for retirement at an early age, as the longer investment horizon makes it easier to save and invest for retirement. For example, suppose you began your retirement planning at 25, and aim to retire at the age of 65. This gives you a solid 40 years to save and invest for your retirement years.

While planning for your retirement, it is also important to account for several factors such as inflation and healthcare expenses, and how they might impact your retirement savings in the long run. This can help you estimate how much money you wish to save per month for retirement. If you’re unsure of how to determine this amount, you may also consider engaging in the services of a professional financial advisor who can help you determine what your ideal savings target should be based on your monthly income and expenses.

In this article, we will discuss different rules and tips that can help you estimate a suitable monthly retirement savings target for your specific financial needs.

Here are two rules that can help you calculate how much you should be looking to save for retirement per month:

1. The 15% rule

The 15% rule states that you should save at least 15% of your annual income every year. Both your pre-tax income and your contributions to your employer-sponsored retirement account are included in this. In a 401(k) plan, employers have the option of matching their employees’ contributions and contributing to their retirement accounts. If you invest in a 401(k) and your employer matches your contribution, you can factor both these contributions at the time of calculating your savings for the year. Do note that the 15% rule can only be applied if you started retirement planning in your mid-20s and plan to retire when you turn 67.

As per some studies, most retirees need at least 75% to 80% of their pre-retirement income after they retire to maintain the same standard of living as when they had a steady source of income. This is dependent on a number of factors such as the age at which you retire and you start saving, your annual income, etc. Let us assume that you earn a high income and continue to take big strides forward professionally. This would allow you to reach the 75% mark sooner compared to folks earning less than you.

You must also take care to cultivate and add additional streams of income in retirement apart from your savings and investments from retirement accounts. Do not forget your Social Security benefits and make sure you add them to your retirement savings. Additionally, inflation can play spoilsport if you are not careful. The 15% rule considers that your savings rate is tied to your income. If your income does not increase or you lose a steady source of livelihood, you would not be able to counter inflation and may need to save more aggressively to make up for the difference.

2. The $1000 rule

The $1000 rule was created by Wes Moss who is a registered Certified Financial Planner (CFP). Under this rule, for every $1000 you need in retirement, you must save a sum of $240,000. How does this work? To be able to withdraw $1000 each month in retirement, you need to plan on a 5% withdrawal rate from your investments. Let us do some quick math:

5% of $240,000 = $12,000 which in turn must be divided by the number of months in a year = $1000.

Note that the $1000 rule might not be helpful for retirees whose retirement may last beyond 20 years. Suppose you call it a day at 65 but live on to 90 years of age, there is a good chance that you may run out of funds for the later years of your life. Additionally, this rule does not factor in inflation. You may deem $1000 a month sufficient to live in the present but that may not be the case twenty or thirty years from now. The value and purchasing power of the dollar will most likely decrease in the future and you may find it difficult to meet your expenses in retirement.

What can you do to increase your savings for retirement?

You need to build a substantial retirement corpus based on factors such as your income, age, retirement age, life expectancy, financial liabilities, responsibilities, etc., to ensure you do not run out of money during the later years of your retirement. No matter which rule you follow to save for retirement, you must try to save at least 75% to 80% of your pre-retirement income before you decide to retire. Doing so will allow you to not only counter inflation but also any unexpected emergencies. This can be especially helpful in cases of health emergencies, as healthcare costs can account for a significant chunk of your expenses during your golden years of life.

To ensure you have sufficient savings for retirement, consider following the tips listed below:

1. Make use of online tools such as a retirement calculator

A retirement calculator can help you find out the exact amount of money you need to save to have a comfortable retirement based on your age, income, retirement age, debt, etc. Not only does this tool help you create a foolproof plan but it also measures inflation as per the past trends and offers you a precise estimate of how much to save per month for retirement. Using this tool can help simplify things and give you confidence in the choices you make.

2. Establish suitable financial goals and targets

Breaking down your major goals such as retirement planning into smaller, achievable targets can help you attain said goals. Set your targets per age and try to achieve them by the said age. Suppose you wish to buy a home by the time you turn 40. To achieve this goal as per your desired timeline, you need to consider different factors such as market movements, fluctuating stock prices or interest rates, rate of inflation, recession, etc., and accordingly, modify your plan and savings strategy. Doing so would ensure that you save regularly and remain on track to achieve your goals. Consider the following calculation based on your age:

• Try and save the equivalent of your present annual salary till you reach 30 years of age.
• Try and save the equivalent of 2x your present annual salary till you reach 40 years of age.
• Try and save the equivalent of 3x your present annual salary till you reach 50 years of age.
• Try and save the equivalent of 6x your present annual salary till you reach 60 years of age.
• Try and save the equivalent of 8x your present annual salary till you reach 67 years of age.

3. Diversify your investments instead of solely focusing on a 401(k)

A 401(k) is a credible and incredibly popular retirement savings plan but you cannot build your entire retirement planning strategy on it. Firstly, even though a 401(k) account is an employer-sponsored plan, not every company offers this retirement account. As long as you stay in a job that offers this account, you can accumulate and build your savings. However, if you switch jobs and your new company does not offer a 401(k), you would stand to lose out on savings. The Internal Revenue Service (IRS) has capped the annual contribution limit to a 401(k) at $22,500 for 2023. However, if you are 50 years of age or older, you can make an additional catch-up contribution of $7,500.

Secondly, if you start a business and quit your 9 to 5 job, you cannot rely on a 401(k). You need to be flexible and look to invest in other options like stocks, bonds, mutual funds, ETFs, or an Individual Retirement Account (IRA). You can set up an IRA yourself and open it via a bank, a broker, or a trade union. For 2023, you can contribute up to $6,500 annually in an IRA and an additional $1,000 if you are 50 and above. This brings your total contribution to $7,500. Even though the contribution limit for an IRA is much lower compared to a 401(k), it is still a great way to boost your retirement savings.

You can also invest in different instruments depending on your goals. Say, for example, you can invest in a Health Savings Account (HSA) to save for medical expenses, a 529 plan for your child’s college tuition, or build an emergency fund to take care of any emergencies that you may encounter in the future.

4. Reach out to a professional financial advisor

You can consult with a financial advisor on how much money you should ideally save each month for retirement. An advisor having the right credentials, certifications, and professional experience can help design a customized financial plan for you based on your individual needs, goals, and risk appetite. Additionally, he can assist you in several different ways such as managing your debt, creating a budget, tax management, creating an estate plan, retirement planning, and more. You also have to consider that each individual has a unique financial situation and one cannot apply generalized rules such as the 15% or the $1000 rule to every person. Further, an advisor can help mitigate the effects of tax, inflation, debt, and more when creating a personalized financial plan for you.

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5. Begin saving from a young age

It is advised that one should ideally start saving early, preferably in their 20s so that you can take advantage of a long investment horizon. The full retirement age in the United States is 67 years. Suppose you start saving from the age of 25 and retire at 67, you would have a total of 42 years to build a retirement nest egg for yourself. If you save and invest regularly, you have ample time to earn long-term investment returns and weather out any short-term market fluctuations. But if you begin saving in your 30s or 40s, not only do you have considerably less time at your disposal but you also build up a lot of pressure on yourself to cover the shortfall. Hence, professionals advise saving for retirement as soon as you begin your professional journey. As the last few years have shown us, you never know when an unexpected event such as a recession, pandemic, or health emergency may occur so you need to prepare for contingencies. Thus, it is important to begin saving as early as possible.

To conclude

There is no right answer to how much money one should save for retirement each month. However, it is advised to take professional, personalized advice from a financial advisor who can offer you clarity on how much to save per month for retirement and what strategies you can use to boost your savings rate. Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.