Welcome to the world of retirement planning, in which everyone younger than retirement age is expected to anticipate future expenses, figure out the amount that will cover those costs throughout old age, and save like mad until they hit the magic number. Unlike previous generations, for whom employers did some of the saving in the form of pensions, current and future generations must sock away most or all of the savings themselves.
To keep it simple, Planners usually arrive at the 85% replacement rate by multiplying your final salary by eight. but doesn't factor in dual incomes; it assumes you'll retire at 67 and spend down your nest egg over 25 years.
I want to give you savings mileposts: Save one times salary at age 35, three times salary at 45 and five times salary at 55. "The idea is to give people a rule of thumb so they know whether they're on track while they have time to make adjustments.”
If you don’t know how much you might spend, it will be hard to know whether you have saved enough by the time you’re eager to stop working. When you finally crunch the numbers, you may discover a funding shortfall that requires you to work longer than you had hoped.
As you plan for retirement, consider tracking your expenses for several months to a year in advance. Then factor in potential big-ticket items, such as a new car or a long trip, that you want to cover. “Many clients are shocked to learn just how much they actually need to live on, and they have not planned well for it,” says Raj, an experienced financial planner
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Andrew Hewitt, another planner, sets a benchmark of 11 times final salary, and others use still other criteria. But the precise number isn't as important as the overall message. "These are all just calls to action to be an aggressive saver," .
"If you've only saved five times your salary and others says seven, you know to get on the stick."
You set that amount, from multiples of final salary to percentages pegged to your preretirement income. But no one formula fits every person or life stage,. "The further away you are from retirement age, the more uncertain the model."