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Do you have enough set aside for retirement? Use this calculator to estimate how much you will need to save each month to fully fund your retirement. Results are provided in nominal and inflation-adjusted terms.

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Planning Your Savings for a Financially Stable Retirement

Authored by Jose Abuyuan on December 16, 2019

Planning your savings for retirement

The changing face of economy and finance have upended how people understand retirement. The generous pensions, high interest rates, and old rules of thumb are a thing of the past. Today's prospective retirees should understand that they live in a different economic reality. To survive and flourish, they must play the retirement game with a different set of rules.

You should not leave the details of your financial plan to intuition. Planning all your available options would help secure your financial future. Tailor your plans according to your needs and retirement goals.

Knowledge is your biggest ally next to time. Keep yourself well-informed of your retirement options and effective ways to build wealth. Advice from seasoned professionals are invaluable to your long-term financial strategy.

How much to save for retirement

The amount that you would need to save for retirement is dependent on several factors. The most important of these include your general health and your current income. Other factors to consider include your lifestyle preferences, potential emergencies, and inflation.

One of the biggest changes since the olden days is life expectancy. People didn't need a lot of money to retire comfortably then because people don't exactly live that long. Today, people expect life spans up to their eighties and nineties. To enjoy this long retirement, you must plan for the long haul.

Living Large

Plan for sudden medical emergencies
Your retirement plan should account for sudden expenses such as medical bills.

The lifestyle you aim for after retirement also matters.

  • Do you want to live it up in a retirement community of choice?
  • Do you want to see the world with your spouse?
  • Do you want to shower your grandchildren with lavish gifts?
  • Do you want to live a quiet life close to your children and their families?
  • Do you want to keep yourself busy with a hobby or business

Many of these aspirations need big nest eggs to fund them. Achieving these goals would guide your savings and investment strategy.

The date of your retirement would also matter. In the past, a lot of people have made early retirement their goal in life. The retirees today think differently. Boomers and GenXers have been less than eager to retire too soon. with some expecting to embrace full retirement at 72.

This isn't always because of the economic climate. Many older adults today love what they do or get bored when they're idle. And because retiring too early has its own drawbacks, this is a lot more sensible than it seems.

Murphy's Law for Economics

Part of what makes retirement planning risky at a later age is how volatile economies are. It is a lesson many people have learned the hard way. No single formula can account for the many variables that affect the cost of living. You would need to prepare for them on top of that.

Your money loses value over time. This is especially clear during times of economic uncertainty or during market corrections. In these times, rates of inflation can skyrocket. You need to hedge against these unexpected changes. This means setting aside even more money when saving and investing in assets that grow in value.

Age and Retirement

People usually think of retirement planning as something to put off until later in life. Nothing could be further from the truth. How you much can save for retirement is dependent on the age you start working toward it. Some lucrative investment strategies work better now than they would later. So the saying goes, the best time to start was yesterday, and the second best is now. Use the time horizons you have to your advantage, especially if you are still young.

Age is closely tied to your risk profile. Although middle-aged and older adults may belong to higher pay scales, they have less time to take advantage of compounding. They would also need to save more of their money to meet their retirement goals. Likewise, many people just starting out might not have as much money to set aside but because of time horizons can take advantage of compound interest. Factoring your age bracket's advantages in your retirement plans.

The Compounding Advantage

On the surface, starting young doesn't seem to be all that workable. An entry-level paycheck may not have a lot left over for savings for anyone starting out. But once you've saved up, the little that you can set aside for retirement can pay you back tenfold. Chief among the advantages gained by starting young is the power of compounding.

Compound interest allows you to earn interest both on the principal and its interest. Thus, you gain more interest at the end of each predetermined compounding period. With time, those who start early can get more returns from a smaller principal.

Risk and Expenses

Young people have a smaller saving capacity. This is due to lower salaries and more debt obligations. Their risk tolerance for long-term investments are high. At this age, you should take full advantage of this once you can afford it. Higher-risk investments like stocks perform well in the long run. You can count on a time buffer to weather through market fluctuations.

Once you're much older, you can't take on as many risks. You can't always afford to wait out short-term market changes when you invest in stocks. You also risk losing much of your money's value in cash investments because of inflation.

What you lack in time buffers, you can make up in disposable income. At this stage of your career, you may suddenly find yourself with a lot more money than you're used to. By this time, your children have grown up and achieved financial independence. Meanwhile, you also have the advantage of fewer to no debt obligations. This frees up much more of your income for savings and investments. You can even add to your time horizon if you plan on retiring at a later age.

A Matter of Savings

Save money to gain money
You've got to save money to make money.

The first step toward securing a comfortable retirement is maximizing your savings. This starts with setting aside an appropriate part of your income as savings. Many millennials are seeing the advantages of setting aside savings. Many of them are doing better than GenXers when it comes to retirement planning. Saving around 15 to 20 percent of your monthly income is ideal. However, any amount you can set aside will suffice when you're starting out.

Setting aside savings reduces your need to play catch-up with your retirement. You also commit less money for the same gains when you rely on compounding.

The Magic Number

Retirement is variable. Your ideal retirement plan may be too little for someone else. A good rule of thumb is to think beyond your needs. Saving more than 25 times your personal expenses is a good way to put you on the path to financial security.

Reaching this so-called magic number should be a milestone, not an end goal. If you can save much more, do so. As appealing as early retirement is for some people, it isn't always possible to do so on your savings alone. The savings you set aside will not always be enough to keep your finances secure for a lifetime. You must give it time to grow unencumbered.

Challenges to Savings

Setting aside money for savings of any sort isn't always easy. There are many obstacles that prevent people from saving and investing. People of all ages must contend with the rising costs of living. Inflation doesn't threaten your funds in the future, after all.

Debts are another obstacle to retirement savings. They affect people of any age. Auto loans and college loans hound people in their twenties. Meanwhile, middle-aged adults are saddled with mortgages and ballooning credit card bills. People with toxic debt may have trouble paying them off altogether.

Debt payments not only stand in the way of saving for retirement. They can also threaten your financial security if they persist long after retirement.

Having a strict and efficient budget can stretch out your income and make room for savings. A good debt management strategy can also help you save more money in the long run.

Maximizing Your Funds

Cashing in on other sources of retirement income such as your social security savings might seem tempting once you've reached your sixties, especially if you're that eager to retire early. This isn't always the best choice, however, as you would miss out on several opportunities for growth. For instance, taking out social security at the earliest point of your life can make you miss out on more than 30 percent of your total earnings.

Conventional wisdom also suggests that you withdraw your funds from taxable assets (social security, traditional 401(k)s, IRAs) first. This allows your nontaxable income (Roth IRAs, etc.) to grow further with time. This remains sound advice for those who want to simplify their financial management. For those who want to boost their returns, however, they should instead follow the highs and lows of taxes and move a portion of those assets to nontaxable accounts. Get advice from a tax or retirement professional to find out how to make your withdrawals tax efficient.

Annuities are another way to stretch out your finances through retirement. Once it matures, an annuity can provide you with a fixed income for the rest of your life. They aren't without their drawbacks. The income from your annuity does not grow, and its value decreases with inflation. They are also very expensive to grow and maintain. If you've capped your contributions and have some extra cash on hand, an annuity may be right for you.

Investment Choices

Grow your investment
Grow your retirement dreams.

Most people young and old put their savings in banks, where they grow at a snail's pace in a low-risk environment. However, taking on riskier options like the stock markets may also lead to greater returns, especially for younger investors. If you're in your 20s, you could be missing out on lucrative gains if you don't invest at least some of your money in the stock market.

Strategies for Growth

Investors see losses from time to time. In bear markets, these can take months to recover. A poor market outlook can scare you into into liquidating your retirement assets. Resist the temptation to do this. Although losses may seem frightening at first glance, these would stabilize over time. It is a better game plan to leave your investments in place regardless of the economic weather. Waiting out the dark clouds pays off in the long run.

Of course, this doesn't mean that you should be overly risky with your money. Dollar-cost averaging allows you to invest constantly while still managing your risks. This involves committing a fixed amount of money to stocks and other investments. In this way, you invest in volatile periods without putting your savings at risk. Moreover, by buying during a downturn, you also take advantage of lower stock prices.

Risks: Tolerance and Capacity

Your risk capacity is a critical balancing act between the risks you can take and those you need to take. There is no single asset allocation strategy for retirement that works for everyone. There are plenty of ways to help you figure out the best strategy for you.

Old wisdom suggested that people proportion their investments based on their life stage. The usual rubric puts it at a hundred minus their current age. Older adults, thus, usually had more investments go toward bonds.

Be prepared to bend these old rules. If you have lofty financial goals, you should prepare to take in more than the usual share of risks. Likewise, your risk tolerance might be much lower if you're still in debt, regardless of age. In this case, it might be sensible to invest first in bonds and other low-risk assets.

No investment is risk-free. If you think being too cavalier with your risk tolerance is bad, try being completely risk averse. you miss 100 percent of the shots you don't take. If you take little to no risks at all, you're missing out on significant returns.

About The Author

Joey Abuyuan is a web content writer, fictionist, and digital artist hailing from Las Piñas City. He is a graduate of Communication and Media Studies at San Beda College Alabang, who took his internship in the weekly news magazine the Philippines Graphic. He has authored works professionally for over a decade.