How Much Should I Save For Retirement?
I have a friend who knows what she is going to have for dinner a month from now. My friend has each meal mapped out on a calendar so there are no surprises along the way, and makes grocery shopping a breeze for her because she knows exactly what she needs long before she walks through any grocery store doors. The irony of my overly zealous consumption-conscious friend is that when I asked her how much of her income she was saving and investing for retirement, she didn’t have an answer like you would expect after viewing her meal calendar. My friend is an amazing example of how tough it is to think that far out into the future despite the tenacity many of us put toward planning. With bestselling books like “Getting Things Done,” and “The 7 Habits of Highly Effective People” it’s intriguing to me that many of us don’t put forth much income toward one of the most important milestones in our lives: Retirement.
The fact is that we aren’t going to be generating an income once we reach retirement, and you can ask just about any acquaintance over the age of 65 how difficult life becomes after you stop working, especially those who didn’t have an IRA or 401k to work with. Spending time clipping coupons will no longer be a thing of the past – it will circle back around to be at the forefront of surviving into your retirement to stretch every last dollar you manage to save.
If you have grown accustomed to a particular lifestyle for the first 65 years of your life, then it will be tough to change. The CIA World Factbook estimates that the average age of death in the USA for 2011 is 78.37 years.  Which gives most of us an average of 13.37 years that we need to have prepared for, but many of us live well beyond that age and it’s much better to be safe than sorry – If we didn’t have hope in the future, then we wouldn’t be investors.
So how much do you need to meet the minimum requirement of having 13.37 years’ worth of funding by the time you’re 65? The answer depends on your situation, and you can plug your current situation into a retirement calculator to get a tailor-made answer just for you, but we’ll use the current after-tax mean family income in the United States, $54,380, and the average savings rate as a percentage of disposable income (after-tax income) from 1999 to 2009, 2.87%, to generate what the average American needs to save for retirement. This would mean that you save about $1,561 per year, and will have saved a base of $54,635 if you were to save from the age of 30 to a retirement age of 65.
|Year||Your Age||Stock Trading 8%||Savings Account 1%||None 0%|
As you can see, based on the 8% average return of the DJIA and S&P 500, stock trading leaves you with the greatest amount, $313,585.38, followed by a savings account, $67,893.32, and the least if you don’t apply any sort of compound interest to your savings, $54,635. If you want to wind up with $0.00 by the time you reach 78.37 years of age, and assuming you continue to invest the proportion of the money you don’t withdraw for personal use in the same way:
|Stock Trading 8%||Savings Account 1%||None 0%|
The numbers here tell a very interesting story about the average American’s personal savings rate and how it could use a little boost for the sake of our retirement years. Even at the average stock market return, you will still have to cut out $15,000 from your lifestyle per year. Boosting your savings rate by only a few percentage points will yield thousands of dollars in the end and will allow you to harness the powers of compound interest to its fullest.