How much should you save for your retirement?
Those of you familiar with the Douglas Adams book in the ‘trilogy’ (I believe there were actually four books but Adams had an advanced sense of humour!) The Hitchhikers Guide to the Galaxy will know that the answer to the question “What is the meaning of the Universe?” was 42.
A great deal of computer time and effort went into discovering this answer, almost I believe as much time as it takes to get to the answer “How much should I save for retirement?”
The answer is of course, it depends.
The duration until your desired retirement age is a key factor of course and the sooner a person starts to save for retirement the cheaper it will be in the long run.
The problem of course is that the demands upon our available income are so great – but don’t use that as an excuse for doing nothing.
The level of income that you want in retirement will also be an important factor.
The larger the percentage of your final earnings that you desire the more money you will need to save.
It also needs to take into account the assumptions that we make about future investment returns and future interest rates because the more conservative the assumptions we make the greater the regular savings amount we need to make.
In our view it is better to err on the side of caution and be conservative rather than face the disappointment of paying in too little.
Years ago, I recall, it was recommended that some one in their mid-30s say, should save 10% of their income in order to achieve a pension equivalent to half pay when they reached age 65.
I suspect the figure now needs to be much higher as expected investment returns and future interest rates are generally assumed to likely to be much lower than in the past.
As a rule of thumb I would argue a figure of about 12% of monthly earnings is a reasonable target savings figure.
When you do a more personal calculation expect the outcome to be quite scary.
Building a retirement fund sufficiently robust to ensure that you never run out of money in retirement is a real challenge. And yes, it can be scary.
Here I am not going to relay any learning from Adams’ books. After all the Hitchhiker’s Guide solution to facing anything scary was to put a towel over your head so you could not see what the threat was!
Do not put a towel over your head when faced with saving for retirement.
