Step 2 – Save enough | On Financial Success

People often set money aside for retirement, but underestimate how much they need to save. Fortunately, figuring out how much to save isn’t too difficult.

How much will I need at retirement?

Experts generally agree that you can safely spend 2-3% annually of your nest egg. Anymore, and you significantly increase the risk of outliving your savings. However, bigger withdraws are an option if you do not intend to leave your nest egg to heirs.

How does 2-3% translate? Well, a million dollar nest egg would provide $20-30,000 annually. If you have a pension, or expect to collect social security, that might be plenty. If your nest egg will be your only source of income, you might need more or a plan to work part-time.

The number will also vary wildly based on your hobbies and how often you travel. Some advisers suggest you plan on generating 70% of your working income; however, expenses will vary. Don’t forget that you shouldn’t have any debt when you retire and you won’t be contributing to retirement accounts anymore!

How much will I need to save?

Lots. The market won’t turn small contributions into a pot of gold.

People often claim the stock market returns 10-12% over the long term. But this number isn’t as big as it sounds. When you take ½ % off for investing fees (the expense ratio) and another 3-4% for inflation, your real gain is closer to 6-8%.

Also, you will only be earning 6-8% on a portion of your nest egg. You’ll want to protect a percentage of your savings in bonds. Bonds are far less likely to rapidly drop 10, 20, even 30% in value like stocks can.

But with this reduced volatility (think of it as security) also comes much lower expectations for growth.

How can I get the best return on my money?

In the end, the market dictates how much we earn. Unfortunately, there is no way to game the system or to super-size our returns consistently.

However, we can take some steps to earn more than the majority of investors. Steps 3 and 4 cover how.

The table below provides rough estimates on how much to save. The figures are based on a flat 6% return, year after year.

Four Steps to Financial Success is a six-page pamphlet on building wealth, distilled into four simple, reliable steps. Continue reading online, or download the color pdf.