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Two questions that plague (or should plague) those of us who don’t have family fortunes waiting in the wings are, without a doubt:
- How much do I need to retire?
- How do I know I’m on track with my retirement savings?
These are questions that should be revisited regularly, as learning about personal finances is a lifelong journey.*
Several calculations can be used to determine the amount you would need to enjoy a comfortable retirement. And “comfortable” in this context is being able to receive an income from your pension that’s between 60% – 90% of your pre-retirement income. This is called the income replacement ratio (IRR), and it’s the ratio of your pension income to your pre-retirement salary. An IRR of 75% is often cited as the ratio we should all aspire to.
To calculate if you’re on track, your retirement savings should be close to 20 times your final annual income (pre-tax). According to the experts, this will provide an IRR of 70%.
If you’re close to retirement, it’s a simple calculation to give you a pretty clear idea of your replacement income. For those of us who still have a good 30 years to go before retirement, the mere thought of attempting this calculation feels like a rabbit hole of inflation calculations, ballpark figures and crystal ball speculations.
The Rule of 300
Enter the rule of 300. You can explore the cogs and wheels behind the numbers in this Wealthy Maths blog.
The rule of 300 is genius because it does all the number-crunching for you. To work out how much you need to retire well:
- Calculate your current monthly expenses
- Subtract the expenses you won’t have when you’re retired (these could include your bond repayments and the kids’ tuition fees, as well as your retirement savings).
- Multiply this monthly cost of living by 300.
Now that you have your number, how do you know you’re on track? Consult with your RA provider or pension fund administrator for better insight into the projected future value of your investments. Numerous online calculators also offer a good indication of the future value of your savings.
The amount we need to save for retirement every month has, more often than not, been dictated by conventional wisdom, our parents’ beliefs and industry recommendations. Some preach 10% from day one until you reach retirement and others dictate that you need to stash 15% away the moment you get your first salary. But life, unfortunately, is not that simple. Because our circumstances and savings goals are as unique as we are, it’s our responsibility to know our number and work towards achieving it.
*Bring snacks.
Retire blog
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, we try to answer some of the retirement questions we hear most often, ranging from which products are best suited to different circumstances to efficient tax treatments.
