How much do we need in Retirement Funds?

If you are like me, you are also hoping to retire comfortably with our families and are wondering how much funds we really need for our retirement. There are several ways that this is being estimated. I’ve read a lot of articles about this topic, and I’m sharing with you what I’ve gathered.

One popular approach I’ve read is to make a projection of your annual income shortly before you retire. 70 to 80 percent of that projected income is assumed to be the yearly retirement income you need in order to maintain your standard of living. If you project 700K as pre-retirement income, 490K-560K should be your annual retirement income. If you expect to live for 15 years after retirement and does not expect any other income that time, you should have 7.35 million – 8.4 million stashed away.  A variation of this method of estimating your retirement need is to use your projected expenses multiplied by your retirement years.

As an accountant, another widespread method used is considering present values, future values, inflation rates, interest rates, saving and expenses, and pre and post retirement years. In this method, we look at the current expenses and get the future value of our expenses. This becomes the required yearly funds needed in our retirement years. You deduct from that amount any expected pension amounts, and the resulting figure is the retirement income gap. The retirement income gap multiplied by the expected retirement years is the amount you should already have by the time you retire. From this amount, you can deduct any expected lump sum benefit or maturity of investments to arrive at the required savings amount by retirement age. After having that amount, you can already compute for the required annual savings using Present value formulas and considering pre-retirement years and estimated interest income.  Confused? Well, you don’t need to worry about making these computations as most retirement calculators you can search in the internet uses this method.

Another method which I personally use is the age-based savings milestones by Fidelity Investment which is very much easy to remember and gives a way to check if we are on track. This method is most relevant in the United States because it factors in their 401(k) or workplace retirement plan and their social security. However, I personally make this my general guideline since it is easier to remember.

Here’s the table they provided:

Save the equivalent of :                               By Age:

1x their annual salary                                     35

2x their annual salary                                     40

3x their annual salary                                     45

4x their annual salary                                     50

5x their annual salary                                     55

8x their annual salary                                     67

 

You can just adjust the numbers or goals here if you think they are too small, but for myself, I just use it to check myself from time to time if I am on track with my retirement savings. Also, I don’t consider here any real estate or other investments that I don’t intend to use up during retirement.

If you think the amount you come up is too low, please also remember that you may still have other income by that age, and you can also earn a lot from placing the funds in high return investments. The savings goal also appears reasonable here especially if you started planning for retirement early. By saving around 10-20% of your income towards your retirement funds, you would actually be able to meet these goals.

Like most Filipinos, I am honestly also struggling to save up for my retirement. Nonetheless, it’s better to have a goal than to have nowhere to begin with.  Happy Saving!

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