How much money should you put aside each month towards retirement? - Blog
Irrespective of the status, be it an individual, a family, small or large business enterprises, saving and investing towards retirement is of utmost importance. After being affected by the COVID pandemic, many surveys have been conducted to study if people hold emergency funds. In a survey carried out in the US, only 40% of the population could pay an emergency expense of $1000, the rest of the population would have to borrow.
Similarly, a survey carried out in 2018 found that 41% of the working population in Europe did not save money every month. This did not seem like a problem to most people until the pandemic came and those without savings were left in tough positions.
European Central Bank’s survey showed that the COVID situation has imbibed a fear of unemployment in the minds of the people which has in turn forced people into saving. However, economists believe that this is an unhealthy way as it not only affects the lifestyle and practices but also causes stress and anxiety causing health problems.
Hence, to overcome situations in the future that would rather force people into saving, it is suggested to better build resilience, plan and set aside an emergency fund that would not force a change in lifestyle, but rather help people cope with uncertainty. After setting up an emergency fund, savings and investing towards retirement should follow.
Planning for retirement
We all long for a good, healthy and restful retirement. As life-expectancy continues to increase, it is important that we don’t outlive our assets. According to the Federal Statistical Office, the average life-expectancy in Germany is 83.18 years for women born between 2015 and 2017. For men, the average life-expectancy is 78.36 years.
Another study by Niessen-Ruenzi and Schneider revealed that we need to start saving early to take advantage of compounding interest and to close the gender pension gap. The earlier we - especially women- start saving, the less we need to save each month and the less the fraction of our annual income is needed to be invested.
How much do you need to save every month?
How much to put aside each month depends on many factors such as:
· How much you earn now
· How much money do you want to live on as a retiree
· How much you currently spend to maintain your lifestyle
· How much you currently have saved in savings accounts, investments, and equity
· Will you be taking care of any dependents?
How you imagine spending your retirement days - staying at home with your family, traveling the world, or enjoying the lives pleasures - will have a drastic effect on how much money you will need to save.
Our blog on how to retire as a millionaire earning minimum wage shows you how much you could save every month. For example, if you start saving for retirement at an early age of 25 years and save about €500 per month and earn 6.5% annual investment returns, your investment will accumulate just over €1 million euros by age 65.
But if you are over 25, then you have to save differently, and maybe more aggressively.
How much to save for retirement by age?
Just like we’ve been saying, there are a few things to consider such as when do you want to retire, how many years you have until you reach the retirement age you wish for and the potential returns on your investments.
In general, you should aim to live off 70% to 100% of your annual pre-retirement figures. For example, if you are earning €62,000 a year, you should plan to have savings and investments that will enable you to earn between €43,000 and €62,000 a year post retirement.
If you retire at 65 and live until you are 85, that means you need to have 20 years’ worth of savings and investments to live comfortably. This translates to an accrued amount between €860,000 and €1,240,000 that you will need by the time you retire.
Another savings method has been put forth by Fidelity. The firm suggests that if you want to retire by 67, you should have saved ten times your annual salary.
So, if you are 65 years old and are earning 70,000 euros a year, you should have saved 700,000 euros. If you are younger, these are the amounts you should have saved: at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67. *This is significantly less than our own suggestion because we are factoring your life span.
In order to meet up with Fidelity’s suggestion, you need to start saving for retirement from 25 years old, and aim to contribute around 15% of your pre-tax income each year. They reached this figure with the assumption that with government support, not all the pension fund will come exclusively from your savings. Thus, most people will need to generate 45% of their pension fund from their savings.
We have put together articles on how to achieve the million euro mark for retirement and what to do when you do not have enough saved up for retirement.
The power of savings, investing and compound interest
No matter where you are on your journey to financial freedom, there is still every likelihood that you can enjoy your retirement. However, the key is to start now.
This is because the earlier you start, the more money you can make via the 8th wonder of the world: compound interest. Compound interest accumulates when the interest your savings and investments generate begin to yield interest itself. Over time, this add up tremendously!
You may be behind schedule, but you can and should start now. You can either go by Fidelity’s recommendation of saving 15 percent of your income or try something more challenging to make up for the lost time.
If you cannot start with 15% of your monthly net income, then do start with what you can and build up gradually. Over the course of many years, this will be a sizeable contribution towards your retirement.
One of the ways to make saving and investments more manageable is to automate it. When you calculate how much money you need to survive in a month, you can automatically save or schedule the rest of the money.
However, be sure to adjust how much you are saving if your monthly income amount changes—your pension fund also wants to benefit from your new pay rise!
Ask questions and make sure you understand the answers. Get practical advice from financial experts and act now!
You are not on your own when it comes to making financial decisions in relation to retirement. If you have some complex decisions to make, it is probably best to talk through the options with a financial adviser.
If you don’t know what kind of expert you need to speak with, contact us.
Photo by Christine Roy on Unsplash