The best way to determine your retirement target savings is to use your income.
Almost nobody wants to work 40 hours a week in retirement. Not you, not me. To avoid that, you must have money at your disposal to cover expenses like food, travel, and medical bills.
But how much do you need?
There’s a 38% chance that if you retire at 65 you will live to 85, and a 5% chance that you’ll make it to 95.¹ That means you’ll need enough cash to cover at least 20 years of life with no income.
This is where your paycheck comes into play.
Aiming to save 20 to 30 times your income helps prepare you to maintain your current lifestyle into retirement. You might even have extra spending money if you’re debt free!
Plus, it forces you to scale your savings as your income grows.
Setting a goal based solely on how much you want to spend in retirement can result in lowering your savings goal. You might splurge more now, telling yourself that you’ll just live on less later. But you’re cheating your future self!
Using your income as a retirement benchmark forces you to increase your savings amount as your paycheck grows. Let’s say you make $80,000 annually and you start saving. Your goal is to stash away 20 times your income, or about $1.6 million.
After a while, you’re able to save 5 years worth of earnings, or about $400,000.
But then you get a raise! Suddenly you’re making $100,000 per year. Your retirement target shifts up accordingly to $2 million. That $400,000 you have in the bank is a hefty slice of cash, but it’s now only worth 4 years of income instead of 5.
In other words, basing your saving around your income actually encourages you to save more as your income increases.
The best thing about this method is that it focuses on the most important part of retiring—to sustain the lifestyle that you envision. Meet with a licensed financial professional to map out what that would look like for you and how much you must save to make that vision a reality.
¹ “How Long Will Your Retirement Really Last?,” Simon Moore, Forbes, Apr 24, 2018, https://www.forbes.com/sites/simonmoore/2018/04/24/how-long-will-your-retirement-last/?sh=31a59fb37472