How much should you save for retirement? It seems that everyone has their own opinion on this seemingly simple question. In fact, as long as you understand the meaning of your choice, the answer is very simple.

Is your retirement savings enough to make you live a comfortable life in the golden age? To solve this problem, we will study the standard rule of thumb for retirement savings. But we will go further. Then we will look at the mathematics and assumptions behind the rule of thumb. Finally, we will introduce those difficult periods in which the assumptions are meaningless for a particular situation.

Rule of thumb

The most common rule of thumb is that households should save 10% to 15% of their total income (before tax). For example, Fidelity recommends retirement savings to eventually reach 15% of revenue.

Save 40 years

For many people, they have waited for 40 years without retirement savings. For these people, they may need to save more than 15% per year. Let us assume a 5% withdrawal rate; in most cases a 4% withdrawal rate is assumed. If you think that only 1% is no big deal, think again. In 4% of cases, you need 15 times of pre-retirement income ($100,000 in our case) to generate 60% of this amount (remember that social insurance includes 20%). But with a 5% withdrawal rate, you only need 12 times the current income. In our $100,000 hypothesis, the difference in retirement savings is $1.5 million, not $1.2 million.

Which assumption is best? I don't think there is the best here. 4% is more conservative than 5%. The logic behind the 4% rule is that you will get 8% annual income, and stock and bond investments are relatively conservative. Four percent of people save to keep up with inflation, and four percent come out to pay for your living.

So, see what you are doing now, and you think you need to live a comfortable life in the future... Are you saving enough for retirement?

Save 10% to 15%

For those just getting started, saving 10% or more of total revenue is a real challenge. In addition to paying for school loans, many people started to build their families and buy the first home. However, the key is to reach this level (or more) as soon as possible. If it seems that there is no money to save money, then take a look at my one-time method of saving money.

Get 5% real return

We cannot control market returns. But we can control a few very important factors. We can control our asset allocation (emphasizing the long-term growth of stocks); we can control our investment costs, and when the market is crazy, we can control our behavior.

Five percent is not guaranteed. The actual rate of return for the next few decades may be higher or lower. But we should focus on what we can control.

4% extraction rate

The 4% withdrawal rate rule is generally considered a reasonable retirement expenditure method. But it is not without critics. Some believe that future market returns will not be sufficient to justify 4%.

The key is to evaluate the hypothesis based on your own situation. The answer may not be easy, especially if you start saving in your later years, but at least you will know your position and what you need to do.