Save Now, Party Later: How Much Do I Need to Save for Retirement?
Planning for retirement is no one’s favorite financial task. You can do everything right—spend less than you earn, build up an emergency fund, ask for a raise at work—and then? Then you have to save and invest money to spend 40+ years from now. Only monsters* enjoy saving money now so they can buy orthopedic inserts when they’re 90.
*It actually gets kind of fun once you’ve made some progress!! I promise.
Unfortunately, retirement planning can’t be ignored. Retirement is insanely expensive—it’ll be the biggest expense of your lifetime. (Especially if you do it right and live it up for decades and decades in retirement!) You’re living 30+ years with no income.
First, Get Your Head Right
Think about your Future Self. Think about what YOU want out of your retirement. Think about what type of person you want to be, your hobbies, your dreams. Seriously, close your eyes and do it.
Need some inspiration? Check out my video, below, called Bad Grannies. It’s basically Golden Girls Gone Wild. I made this video because I wanted to create something visual and fun that’d provoke you into thinking about old age as an opportunity for liberation.
The plain truth is, the more you save (and invest), the less you’ll have to work. Money = Freedom. I didn’t stick around in this biz because I like to talk about money, aw fuck nah, Sis!! I’m here to talk about freedom, and what it takes to be financially free.
Your darling Old Lady self is going to want to be able to take care of herself with the confidence of an inter-generationally wealthy real estate tycoon. You’ll also want to have fun and spend time with your family and friends. You’ll have interests and passions, just as you do now. Maybe you’ll want to volunteer with your favorite charity! Maybe you’ll want to spend your time reading Literature (w/ a capital L) at your cabin on the mountain! Maybe you’ll want to use your Old Lady Scent™ Yankee Candle to pour hot wax all over your significantly younger lover(s)! It doesn’t matter what you want but VISUALIZE THAT SHIT. I hear everyone’s making vision boards these days. Well, add some friggin pics of Old Ladies doing pull-ups at the gym or lounging in Bora Bora with stiff cocktails in hand, mmkay? #oldladygoals
I am pounding on this idea of Future Self like I’m tenderizing a four-dollar steak because I believe that remembering WHO we are doing this for makes navigating the process of retirement planning so much more manageable. We’ll talk numbers next, but remember, it’s not really about the numbers. It’s about You. It’s about Old Lady You, who isn’t going to want to roll over and die when she’s 65 years old. (She is YOU, after all!) She’s going to want to fucking rage. And that costs $$$.
Understanding the Numbers
Before we go cooter-deep in denominators, I want to be upfront: Retirement numbers suck. They might overwhelm you. And to be honest, they’re not all that important if you’re just getting started. If you’re financially stressed, just open up a retirement account and commit to whatever dollar amount that you can, without worrying that it won’t be enough or that it’s not worth it. It is worth it, I promise you.
I think it helps to look at a timeline to put retirement saving into perspective.
The years in red are your working years. Yellow’s your retired years. That’s a wholllllle lotta yellow—almost as much as there is red. Which basically means that you have one income to afford two lifetimes. Does this mean you have to save half of your salary?! Luckily, no. We can invest to help with some of the heavy lifting of retirement saving. But it does mean you’ll need to save a lot.
The next step is to think about how much money you want to spend, each year, in retirement. This is called your “replacement rate,” because it “replaces” the income from your job. Your replacement rate will depend on where you live, your expected standard of living, and whether you’ll own or rent. Also, you must consider health and elder care. Assisted living costs, on average,. It’s even more expensive on the west coast and in the northeast. Medicare does not pay for assisted living, and Medicaid help varies by state. If you think you’ll NEVER end up in a nursing home, get real. Hubris or denial now could cost you your comfort and dignity in old age.
For example, perhaps you think you’ll want to spend $60,000 per year, in retirement. If you plan on taking that money from a 401(k) or other “traditional” retirement account, add expected income taxes on top of that. (This is not true of a Roth IRA.) I predict that I’ll owe about 20% so I would need $80,000 per year. Your replacement rate should be less than the salary at the end of your career; hopefully, you will have paid off all major debts. After you’ve determined your annual replacement rate, multiply by 25 to find your target retirement number.
“But why would I multiply by 25, instead of the 40 years I expect to live in retirement!!?”
Here in the money biz, it is believed that you can reasonably expect to shave 4% in earnings off the top of your investments without running a risk of draining your account before you die. Ideally, we make your Old Lady Stash last “into perpetuity” (forever) by continuing to invest and skimming off the top. Multiplying the replacement value by 25 is the inverse equation of multiplying the target retirement number by 4%.
For example, $2,500,000 x .04 = $100,000
$100,000 x 25 = $2,500,000 which is the same as $100,000 ÷ .04 = $2,500,000
Once you get to a point where you feel like you could live off of 4% of your retirement account, you could hypothetically retire, and that money could potentially last for the rest of your life, whether that means ten or 60 more years. Now, there are many, many problems with the 4% assumption, which I don’t have the space to dig into here. But for one, stock market returns are not a foregone conclusion. Capital markets could crumble like a Nature Valley Oats ‘n Honey bar beneath the weight of nuclear war or even a complete lack of faith in “the system.” I don’t think it will, and I think that the 4% rule is a fine one to strive towards, but carefully consider this rule before you take it as gospel.
Don’t Forget That Bastard—Inflation
I have more upsetting news. What we just calculated? That’s all in “today’s dollars.” But as we all know, shit gets more expensive each and every year. When I put $15 in the bank today, I want to be CERTAIN that it’ll buy me some kitty cat nipple tassels when I’m 80, but unfortunately, those nipple tassels will cost $65 in 2068. One million dollars today will not be one million dollars 40 years from now. Inflation—or steadily rising prices over time—is manufactured by the government and considered desirable for economies, but it’s a nuisance for long-term savers. Here are the same calculations we made above, this time accounting for 3% inflation:
(This is assuming you are retiring 40 years from now.)
This is why we have to invest. If we invest in the stock market, we can probably expect to earn about 7% over time. It would be tits if it were more (it’s 10% historically) but we can’t count on that. Still, 7% means you’ll keep up with inflation (3%) and grow your Old Lady Stash beyond inflation (4%). You can create additional real wealth. If you don’t invest and sit in cash, that means your money is losing value at a rate of about 3% a year. It’s a huge financial risk to do nothing.
Don’t overthink the inflation thing. The target is so obscenely high, but we have help. In the future, your salary should also reflect the upward trajectory of inflation. Hopefully, you’ll also be earning more! This doesn’t give you an excuse not to save now, though. As you can tell, saving for retirement is urgent, and every bit matters.
The 10% Rule? Or the 20% Rule?
For a long time, the general rule of thumb has been to save 10% of your salary for retirement. This probably won’t be enough. Even if you made the equivalent to a $100,000 salary for forty years (adjusting for inflation) and saved 10% of your income, and invested at a rate of 7%, you would end up with under one million dollars (closer to $850,000). Looking at our inflation-adjusted chart above, $850,000 just won’t buy us that much in 40 years. We have to consider saving and investing at least 20% of our incomes to reach long-term goals.
If you have an employer match, GO GET IT, IT’S YOURS, EVERY LAST DONUT SPRINKLE.
(j/k y’all please no scratch-offs)
What About Social Security?
Pretend it doesn’t exist. Social Security, our government-run retirement plan, isn’t in terrible statistical shape like we sometimes hear (Medicare is far worse) and I doubt it’ll go bankrupt, but it’s always at political risk. While I do expect that we will get paid out at least a portion of our Social Security, I don’t include it in my planning. I’d advise you to do the same.
I know. It’s a lot. I understand that for many of you, saving for retirement right now just isn’t feasible. That’s okay. If you have credit cards, pay them off. If anxiety over student loans makes your lungs feel like they’re being wrung out to dry, deal with that. And if you are truly living paycheck to paycheck, focus all of your energy on earning more.
But if you’re simply putting off retirement planning because it sucks, don’t. You don’t have the time to dick around.
Future You is calling you to arms. Do what you can, today, so that you can manifest the Old Lady Future you dream about. Whether that means increasing your 401(k) contribution by 5%, opening a Roth IRA, or exploring other ways to save and invest your money (rental properties, passive income streams, etc.), take action now. Future You will thank you <3
Want to read about investing? Start here.
Nothing you read here, or on this blog, should be construed as investment advice. Do your own research, people. This is for entertainment purposes only. And if you do invest in the stock market and think it’ll never go down, I’ll come to your house and smack you.