By way of an answer- “as much as you can” would not be incorrect. There are varying estimates on the appropriate level of saving that you should be doing annually but a median guideline is around 15% of your annual income. In simple terms, if you earn 100,000 USD a year, you should be saving 15,000 USD each year. This should be 15% of your pre-tax salary. If for whatever reason 15% is impossible- stick to what is possible. Eventually saving 15% may become practicable, but even if it doesn’t, you will still have some savings that you can rely on later.
Spend What’s Left After Saving (and not the other way around)
This may seem simple, but is commonly ignored advice. If you are unable to answer the question “how much do you save each month?” it means that you probably spend first, and save later. This is a fundamental error that will result in poor savings discipline; often with prolonged periods of over-spending with little savings despite receiving a paycheck every 30 days. If you have a predetermined amount each month that you set aside, the remaining money outside of this can be spent as you wish- guilt free. If you have to ask “how much should I save?” then you are definitely not saving enough.
Once you have got into the habit of saving first and spending later you will soon accumulate capital. At such a point it may be prudent to consider other options to cash that will increase your wealth, and either shorten the distance to your retirement goal, or increase the level of income that you can enjoy in the future. If your savings are earmarked for retirement you probably have a medium to long-term time horizon ahead of you which can absorb the short-term fluctuations of the market, enabling you to maximise returns. Keeping things simple you could consider allocating across a basket of:
- Bonds- a loan to a company or government in return for its promise to pay back what you loaned, with interest.
- Mutual funds- Instead of investing directly in stocks, bonds, or real estate, for example, you can use mutual funds. These pool your money with money of other investors and are managed by professional investment managers. A stock mutual fund, for example, would invest in stocks on behalf of all the fund’s shareholders. This makes it easier to invest and to diversify your money.
- Savings accounts, Money Market Mutual Funds, Certificates of Deposit, and Treasury Bills- These are sometimes referred to as cash or cash equivalents because you can get to them quickly and there’s little risk of losing the money you put in.
- Stocks. You own part of a company.
The balance between these different asset classes will depend on your risk tolerance and how much time you have before you wish to start spending the money. What will however be the case for everyone is that it will be near impossible to reach your retirement goal comfortably unless your money is invested and the rate of growth is exceeding that of inflation. For some insight into portfolio construction you can read more about our methodology here.
based on a growth rate of 7.5% p.a with a 1.5% account + management charge
With many of the worlds governments becoming increasingly insolvent the future of state pension benefits looks bleak and people who do not make provisions for themselves will be met with an unpleasant surprise come retirement age when they see that the government will not be providing financing for a dignified, let alone comfortable retirement. At present we are forced to acknowledge that:
- Global unemployment is set to rise from 202 to 212 million by 2019
- An estimated 74 million people aged 15 to 24 were out of work in 2014. This equates to a global youth unemployment rate of almost 13%
- Many economies are still struggling to recover from the last recession
- Recession has forced many to cut their pension contributions – ONS reported a drop of over £1.4 billion in the UK between 2007/08 and 2012/13
Whether or not future generations of retirees are able to live enjoyably will be determined by the extent to which they planned, and stuck to that plan; and it simply all comes down to saving something each and every month, for as long as you can. Talking to a financial advisor or retirement planner may be beneficial to better understand your goals and how to accomplish them and then you can decide if you wish to go it alone, or have somebody else do the heavy lifting for you.
Tips For Retirement Saving
- Start now. Every year that you wait to start, your goal gets further away and it will cost more money to take you there with each passing (misspent!) paycheck.
- Save whatever you can. Even if its only a small account. Take advantage of investment accounts and retirement savings accounts with small minimum contributions.
- Use automatic savings plans to automatically contribute to a basket of investments.
- CREATE A BUDGET.
- Save regularly, making sure that you meet your savings targets monthly.
- Decide how long you have to save and then allocate accordingly to mutual funds and other retirement funds to maximize your savings.
- Utilize offshore savings accounts to access higher interest rates and increased levels of regulatory protection.
- Choose investments and accounts in tax efficient jurisdictions to limit the negative effect of tax payment and withholding tax deductions.
- Don’t dip into your retirement savings unless you absolutely have to.
To better understand the long-term implications of saving regularly you can view our compound interest calculator to see the affect of growth on your own savings. If you have started to consider the implications of not having enough money to support yourself in later life, or not having sufficient capital to have the retirement that you had always hoped for, then you have already taken the first and most important step in retirement planning. Continued employment, steady saving and sensible investment decisions will create a firm financial foundation, irrespective of income level.
– International Labor Organisation (ILO) Office of National Statistics
– CIA World Factbook 2015
– Gallup, 2014 Economy and Personal Finance Survey
– Vanguard, How America Saves 2014.