Three questions to put you on track toward a retirement bliss

• Regardless of age, understanding you’ll likely need about 80% of your current income in retirement sets the stage for calculating your financial needs.

• Use retirement calculators or follow the 10-12 times your salary or 25x rules as benchmarks to see if you’re on track. These methods account for inflation and expected returns, offering a roadmap to your retirement savings target.

• To bridge any savings gap, increase your contributions to tax-advantaged accounts. Consider investing in target-date funds for a hands-off approach, and prioritize saving over relying on social security to build a solid retirement fund.

The best time to start planning for your retirement is, well, yesterday. But the second best time is right now. So whether you’re rocking your 20s or cruising through your 40s, today’s the day to start figuring out what you’ll need to hit your targets. And if the thought of planning for your post-work life has you scratching your head or wringing your hands in nervousness, do this: take a breath, and then grab a pencil and some paper. I’ve got three questions to get you started, and we can take them one by one.

1. How much do you need to retire?

To figure out the cash stash you’ll need for retirement, you’ll want to make two important guesses: how much dough you think you’ll need each year, and how long your endless weekend might last.

A handy shortcut to ballpark that first figure is the 80% rule. It says, essentially, that each year, you’ll need 80% of what you’re making now to keep living the way you like when you hit the retirement road. So, if you’re pulling in $100,000 annually now, you’d want to stack up enough money so that you’re bringing in $80,000 a year in retirement. That might seem like a 20% salary cut, but, trust me, it works out. People just spend less in retirement, with no dry cleaning bills or daily commutes to pay for. And if you’ve wiped away your mortgage and other debts by the time you retire, you could make do with even less.

A ballpark percentage of the income you’ll need in retirement. Source: T. Rowe Price.

Where you call home plays a big part in shaping your expenses, including the balance between the benefits you get and what you have to shell out. Here’s a handy tool that can help you get a detailed look at your retirement expenses.

Keeping an eye on your retirement income is pretty crucial too. It’ll help you figure out exactly how much you need in your kitty. A chunk of your income is likely to come from Social Security payments in the US, or government pensions in other places – and those will vary from country to country. You might also have income from annuities or rental properties. But the majority of what you’ll need will likely come from your own savings and investments.

2. Are you on track?

After you’ve got a clear picture of your retirement costs, the next step is figuring out the size of the nest egg you’ll need. Imagine you’re getting $30,000 a year from government benefit payments, after taxes. If we go by the example where you need $80,000 annually, you’re looking at needing another $50,000 a year to hit your goal.

With an inflation rate of say, 4%, and a modest after-tax portfolio return of 5%, you should aim for a $1.3 million portfolio to cover a 30-year retirement that starts at 67. This should allow you to generate about $50,000 a year in income from your investments.

Now, if these numbers make you dizzy or you just want to tweak the figures a bit, here’s a super helpful retirement calculator you can use to explore different scenarios.

Alternatively, you can also consider these two simple rules of thumb:

(a) The “10 to 12 times your salary” rule

Some financial experts suggest putting away 10 to 12 times your pre-retirement gross income by the time you retire. It’s a snappy way to check whether you’re on the right path to retirement bliss. Here’s a table that lays out savings goals by age.

Savings targets by salary multiples, according to age. Source: T. Rowe Price.

(b) The 25x rule

This guideline is pretty straightforward too: sock away 25 times what you’ll spend yearly once you retire. Sticking with our scenario, if you estimate that you’ll need $50,000 annually for retirement costs, you’re looking at a goal of $1.25 million saved up by retirement time.

The 25x rule and its cousin the 4% rule are two peas in a pod. The 4% rule is all about being able to withdraw 4% from your retirement pot every year to cover your living costs (with a little inflation adjustment), and not run dry for at least 30 years. The gains and growth from your savings should hopefully outpace inflation, keeping your finances in the green. This 4% figure essentially flips the 25x rule on its head, giving you a way to work out how much you’ll need to save.

3. What do I need to consider?

Heading toward a snug retirement means making sure there’s no gap between the cash you’ll need later and what you’re stashing away now. If the numbers don’t line up, you’ve basically got two options: save more or plan to spend less. As your income goes up, your savings should too. And don’t sweat it if you’re playing catch-up closer to retirement – better late than never!

Make sure to make use of tax-advantaged retirement nests like 401(k)s, IRAs, and Roth IRAs in the US, or self-investment pension plans in the UK – they can supercharge your savings without feeling the pinch from taxes.

If in doubt about how to save, consider opting for a target-date fund. These investments are crafted in such a way that just one of them can act as your entire portfolio, both during your working years and into retirement. They are structured to maximize your returns by a specific date (usually your expected retirement year), and they do all the asset allocation and rebalancing legwork for you, so you never even break a sweat.

Personally, I lean toward playing it safe with retirement planning. That means not betting the farm on government retirement benefits but instead focusing on a savings goal that’s more in my hands. Think of social security and programs like it as just a slice of the pie – you’ll want other savings or income streams to make up the other slices. And that means it’s time to think ahead and invest wisely.

-

Capital at risk. Our analyst insights are for educational purposes only. They’re produced by Finimize and represent their own opinions and views only. Wealthyhood does not render any investment advice and has no control over the content.