There are 3 important steps you need to know and follow that will help you understand how much you need to save in other to live a financially independent and peaceful life after retirement. The following paragraphs below, detail out the steps you will need to follow in order to attain financial independence.
1)At what age are you planning to retire and how long do you plan to live after retirement?
- To answer this question, let’s assume that you plan to retire at age 66. (note that this is just an example. For those who which to retire earlier, you can also follow the same steps by modifying the age number above)
- Now let’s assume that after retirement at age 66, you plan to live up until 90 years of age. that is to say you plan to live for 24 more years after retirement.
- Let us assume that you are 25 years old presently, which means you will be working for the next 41 years before retiring ( that is 66 years as retirement age minus your present age 25, gives you a difference of 41 which is the amount of years that is left for you to work before you retire).
2) How much do you need to save and how much will you like to spend at your retirement?
To know how much you have to save for retirement, we need to make an estimate of how much you will love to spend each month during your retirement.
Let´s assume that you will like to spend 3,000 dollars a month after your retirement which will include your housing and feeding. (Note: again, these expenses may vary for every individual. There are persons that will like to take vacations or persons with high medical bills, all of these will just depend on the individual to decide on what he/she thinks will be their expenses and therefore make those inclusions into this estimation).
Now that you have assumed to spend 3,000 dollars per month after your retirement, if you multiply that amount by 12, we get 36,000 dollars per year. (3,000 X 12 months = $36,000).
So, you are going to be spending a total of approximately $36,000 each year.
Next is to know how much you are supposed to have saved at age 66 that will permit you to spend 36,000 each year after your retirement until you get to age 90 and you are ready to say “bye” to this planet earth.
To know how much you should have had saved by age 66, we just have to discount all the 36,000 yearly cashflows which are the expenditures you will be making during your retirement from your far future age of 90 to your near future age of 66. (that is, you need to discount all the 36,000 to your age of 66th year which is your age of retirement to be able to know how much you should have saved at age 66. The amount you must have save at age 66 if you have to spend 3,000 monthly given this example will be $349,438.02 (Note that this savings can only be possible by investing in an asset that will give you a 7% interest on savings or investment.)
This means by age 66 you should have saved $349,438.02 ( Note; it does not matter if you are 30, or 40, or 50, remember that you still have the possibility to do something now. Never say you can´t, it is better to ask, how can I start now?
3) How much do you have to save now so that by 66 years you will have $349,438.02 in your savings account and ready for your retirement?
Now you know how much you are supposed to have saved by 66 years in order to live your dream retirement life spending 36,000 dollars every year and just living the good life.
The big question here is how much do you need to save for the next 41 years? (remember that we assumed that you are just 25 years now and you still have 41 years to work and save some money before you retire at age 66. So, you need to know how much you should be saving each year and then divide the amount by 12 months to know how much you should be saving each month during the 41 years that you will be working before your retirement.
To know how much you need to save, you take the amount of money that will be in your account at age 66. That is you take the $349,438.02 and consider that you already have that money in your account in your future but that money has been loaned to you by a bank and you need to start paying the loan the bank has given you in the future. These payments that you will be making every year for 41 years, will be the amount of money you will save. These means you will have to save $1,628 each year, divided by 12 months is $136 dollars every month.
This implies that you will have to be saving $136 every month from today into your retirement account so that by the time you get to age 66 and you are retired, you will have $349,438.02 in your account and you can spend 3,000 every month and 36,000 every year until you get to the age of 90.
VERY IMPORTANT NOTE. We the finance team, we understand how over whelming it is for you to read through all this. To make it very simple for you we have provided an excel file (A financial Calculator) for you at our resource page in our website. So that you can just fill in your details such as your age, amount you will like to spend in future, the age you will like to retire, and you will know how much you have to save every month. So, don´t be worried about the formulas. we are always here to serve you. CLICK HERE TO GET YOUR FINANCIAL CALCULATOR