Funding Retirment is Painful…Unless You Start Early

How would you feel about a 20% reduction in pay for forty five years! Unless you start contributing toward your retirement early that is a very real possibility!  No one wants to see a huge cut in their standard of living when they retire, so how much do you need to contribute toward retirement to keep your standard of living?

Social Security

The Social Security Administration has a web site to estimate your benefit.   Using that calculator I found that my estimated benefit could range from 20-40% of my salary per year, depending on when I retired.  I also suspect that the benefits will have to decrease as Social Security may need a bailout.    However, I can’t see Social Security disappearing completely either.   For my calculation I assumed it will cover 30% your salary.  Now most of us would be eating cat food if we had to make it on 30% of our salary so what do we do about the rest?

Investments to the Rescue

What you invested over the years must provide the rest for you.  You can’t reasonably expect to make more income when you are 90, so you better not withdraw too much or you will be forced to live on only social security.  The rule of thumb is that a 4% withdrawal rate is very unlikely to deplete your investments.  Say that you wanted to prove 70% of your salary from your investments, how much money would you need? When 70% Salary = 4% investments then your investments need to be 17.5 times your salary.  As an example if you make $50,000 that means you need $875,000 to reasonably provide 70% of your salary.

But You Haven’t Been Spending 100% of Your Salary!

If you have been saving 10% of your salary to invest before you retired, then you are used to only spending 90% of your salary.  You shouldn’t need a 10% raise when you retire to keep your standard of living the same!  To keep the calculation simple I’m not including inflation either.  This is the same as assuming that the only increases to your salary are cost of living increases.  Since time is money and interest rates matter both are big factors to how much you need to save:

  • Saving 10% of your income just won’t cut it unless
    • You start very early
    • You get good returns
  • The returns in this example are after inflation,  so 8%  is a very good return!

It’s also interesting to see how much you contribute versus how much your investment returns contribute.   If you get 8% returns the following graph shows the following breakdown:Contributions vs InterestThe It’s the wonderful power of compound interest at work!  When you start early not only will you contribute less, but you will live on more in retirement:So do yourself a big favor- start contributing toward your retirement today rather than cutting to the bone tomorrow.

Leave a Reply

You must be logged in to post a comment.