How to much to save?

The article I wrote about yesterday discussed the lack of savings in today's retirees. It's only going to get worse because of the decrease in SS and lack of pensions. So what should people in their 20s, 30s, and 40s be saving?

Well let's assume you need to save $1M for retirement. This will give you an annual income of $40k. That's pretty good. Of course these numbers can be adjusted based on your income. Personally I would shoot to replace 100% of your income in retirement rather than the suggested 75%. Mostly because previously people had pensions and employer provided medical insurance in retirement. That is a thing of the past. Those are bonuses that can no longer be counted on.

I'm not even sure SS can be counted. It's possible that for 20-somethings it will be distributed according to need. If you have a savings, you won't get it. Also with Medicare, I'm not sure if we can really count on it paying for 80% and if it won't go down to 50-60% coverage. Hence I would plan on replacing 100% of your income so you can buy supplemental insurance and 20% of your medical bills not covered by insurance.



Now assuming all savings will be done in either a Roth IRA or 401k, it means it's a tax deferred savings vehicle (no taxes paid annually). Also assume that you have $0 (nothing) saved. Let's also assume an 8% return on everything.

So if you are 55 with 10 years left to retirement, you need to save $68k/year (5500/month) for 10 years to have $1M. Ouch. But if you are 45 and have 20 years until retirement, you only have to save $21k/year ($1750/month). That's a bit more managable assuming you are in your peak earning years.

Now if you are 35 and have 30 years until retirement, you only have to save $8500/year ($708/month). That's golden! Basically if you save the maximum for a couple, in a Roth IRA for 30 years you will have $1M tax free for retirement for the DH and DW!

Of course if you are 25 and have 40 years until retirement, then you only have to save $3500/year ($290/month). This means if you are single and start saving the maximum into a Roth IRA for 40 years, you will have $1M for yourself.

Wow, now if you are younger and starting to save, I hope this motivates you. The longer you have until retirement, the smaller the numbers look. The easier it looks to achieve a large nest egg. The more feasible it is to think positively.

But even if you are older, now is the time to start. There is potential to save something for your retirement. And you could perhaps afford a better lifestyle than you expected if you save something rather than depending solely on SS.