The Easy Way to Calculate How Much You'll Need to Save for Retirement

Figuring out how much you’ll need to save to comfortably live in your older years can be a tricky—and daunting process. Getting the finite details is one thing, but coming up with an estimate to work towards isn’t. Here’s some super-quick math you can do to figure it out.

Over at US News Money, Scott Holsopple explains that the first thing you should do is to take the amount of money you’re making today—your current annual salary, pre-tax (since a lot of people forget they’ll have to pay taxes after retirement too!)—and multiply it by 20.

This assumes you’ll spend roughly 20 years in retirement, which may or may not be what you’re aiming for, but it’s a good estimate. If you have a particularly long life expectency, you might want to bump that number up a bit. If you’re young and you think your earning potential hasn’t capped out yet, use the salary you think you’ll have at 35 or so for this calculation. Once you’re finished, you’ll have your target nest egg.

You’re not done yet though. How much you should actually aim for now depends on what kind of lifestyle you want to life when you’re older. Now you need to factor in the "replacement ratio" for the lifestyle you’d like. Here’s what Holsopple says:

Simple lifestyle versus current; little-to-no-travel; inexpensive hobbies: 80%

Moderate lifestyle versus current; upgrades to home and car expected; some travel and hobbies planned, but nothing lavish: 90%

Maintain your current lifestyle: 100%

Improved lifestyle versus current; increased travel and hobbies: 110%

If you expect to have remaining debt upon entering retirement, add 5 percent to 10 percent to your replacement ratio depending on the amounts you still owe.

Once you know your replacement ratio, use this calculation:

(current income x replacement ratio) x 20 = your retirement savings goal

For example, if you currently earn $100,000 annually and determined your replacement ratio to be 90 percent:

($100,000 x 0.90) x 20 = $1,800,000

Again, this assumes you’ll spend 20 years in retirement, so adjust accordingly if necessary.

It may sound tricky, but it’s easy to do, and gives you an idea what you should aim to save towards, starting now. The sooner you start, the easier it’ll be. Of course, if you plan to work into your retirement years, or work until you just can’t anymore, that’s fine—but it shouldn’t stop you from saving in case you simply can’t, or something happens to force you to live off of your savings.

There’s obviously more to planning for retirement than this, but it’s a good estimate. Hit the link below to read more, and take the next steps after these.

How to Make a "Fit" Retirement Plan | US News Money

Photo by discpicture (Shutterstock).

from Lifehacker http://lifehacker.com/the-easy-way-to-calculate-how-much-youll-need-to-save-1539111110
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