Retirement for Beginners (Part 1): How Much Do I Need to Save?

It’s Retirement Month at The Financial Gym, and we’re kicking off the month with a retirement guide for beginners. Since it’s a big topic, we’re breaking it down into several parts, and this is part one, where we’ll talk about how to figure out how much you have to save in the first place.

A lot of the articles we see out there about retirement are, well, just not helpful. Some throw out huge numbers that sound impossible to reach without telling you how to get there. Others make broad generalizations about “what every 30 year old should have saved for retirement” that don’t take into account the very different lives we all lead. Some claim to tell you what multiple of your salary you have to have saved at every age, but then don’t take into account things like cost of living or family size.

We find these “facts” pretty problematic.

First of all, they are all decontextualized. A person living in an expensive city will likely need more money for retirement than someone living in a lower cost of living area. Those who expect to have a caretaking responsibility for a family member will need to account for the added costs or reduced wages that entails. (This is a responsibility that has a profound impact on women, in particular.) There are also a lot of unknowns, like how much social security you can expect and whether you expect to be on the receiving end of family inheritance.

At The Financial Gym we pride ourselves on actually making personal finance personal, so we wanted to tackle this question ourselves, with an emphasis on figuring out what saving for a secure retirement means for you.

How much money do you need to save for retirement?
How much you need to save for retirement is a function of how much you need to cover your expenses. According to the well respected Trinity Study, you’ll need to save 25 times your yearly expenses to retire, assuming you’ll be retired for a period of 30 years. This means that if your expenses are $4,000 per month, you’ll need about $1.2 million to retire, after taxes, which would be $1.6 million before taxes, assuming a tax rate of 25%.

I know I just told you that we wouldn’t throw big, scary numbers at you with no context, so let’s take a closer look at how you get to that target. 

Let’s say that to get to that $1.6 million number you just had to save every dollar yourself and stash it in a bank account. If you are 30 and planning on retiring at 65, that would mean that you’d have to save $45,714 per year for a period of 35 years, assuming a retirement age of 65. That adds up to saving about $3,809 per month. This is a crapload of money, but luckily, you’ll have some help.

When you save for retirement, you won’t be saving in a piggy bank. You’ll be investing, so you can expect your money will grow over time. And the earlier you start, the more you can rely on time to do the heavy lifting so that your money is working just as hard for you as you are.  

For example, if you were starting right now, you could invest 14% of an $80,000 salary, or $11,200 per year for 35 years. Assuming a 7% rate of growth of your funds over time, and consistent contributions, this would get you to $1.6 million by saving just under $1,000 per month. This is still a lot, but way less than the ~$3,800 figure you’d have to reach if you just stuck your money under a mattress.

We know that socking away $1,000 per month is a hefty goal in itself, but depending on your workplace benefits, you may have some help. For instance, if your employer matches the first 3% of your contributions to your retirement account, then you can reduce your contribution to 11%, or $8,800 per year and still hit your ultimate goal. This gets your required savings number down to about $733 per month, which puts about $250 per month back into your monthly budget while still letting you hit your goal.

How did we just turn a $3,800 required savings rate into a $1,000 required savings rate? We didn't. That is the power of compound interest that comes with investing. In our next article in this series, we’ll go deeper into the power of compounding and what this means for your investments, so stay tuned!