How much to save for retirement depends on the type of lifestyle you’re aiming for
How much to save for retirement varies for each investor. A fulfilling retirement is not simply a matter of accumulating sufficient wealth to give you peace of mind. It is equally a matter of knowing what you will do — in effect, ensuring that you will be as active and productive with your time as you were during your working days.
These days, more investors suffer from what you might call “pre-retirement financial stress syndrome.” That’s the malady that strikes when it dawns on you that you don’t have enough money saved to be able to earn the retirement income stream you were banking on.
To alleviate this worry, we recommend that you base your retirement planning on a sound financial plan. Here are the four key variables that your plan should address to ensure you have sufficient retirement income:
- How much you expect to save prior to retirement;
- The return you expect on your savings;
- How much of that return you’ll have left after taxes;
- How much retirement income you’ll need once you’ve left the workforce.
Consider taxes when determining how much to save for retirement
As for the tax structure, it keeps changing. But it’s safe to assume that you’ll pay a lower rate of tax on dividends and capital gains than on interest, and that you’ll generally pay taxes on capital gains only when you sell.
As for the return you expect, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume you can make money trading in bonds. For stocks, the market returned 10% or so yearly on average over the past 80 or so years. Aim lower — 8% a year, say — to allow for unforeseeable problems and setbacks.