Saving for retirement: How much is enough?

Question

I am 27 year old, i wants to save for my retirement, but i am confused. How much is enough in order to live life happily after retirement?

Answer 1

I'd encourage you to use rules of thumb and back-of-the-envelope. Here are some ideas that could be useful:

• save at least 10% of your income, but 15% is better. Your savings rate will need to cover everything (retirement, emergencies, houses, cars, kids) and 10% probably isn't good enough for that.
• you might withdraw 4% per year in retirement, which implies you might want to reach 25x of whatever you would live on in your 50s... if you save half your income, you don't need to plan to spend 80% of your income in retirement, right? (be sure to keep pretax/post-tax equivalent when calculating this, i.e. either gross or net income on both ends) (also, 4% assumes "spending down" a bit rather than living only on principal, I believe)
• save an emergency fund first, before anything else
• retirement or home downpayment first is sort of a personal call, in my opinion. how soon do you want to own a house?
• you can always stop saving in retirement-restricted accounts if you get "enough" in there, and the earlier you save the more you benefit from compounding
• 6-7% is a much safer investment return expectation than 10% (10% might be OK if you're talking nominal and not real, but I think it's easier to just use real returns instead of picking a nominal and an inflation assumption separately)
• when you get a raise, divert at least part of it to auto-deposited savings so you don't inflate your lifestyle
• for most of us, our time is almost certainly better spent thinking about our income and career than in detailed investment planning - if you do the math, assuming you save 10-15% of whatever you make, then boosting your income 20k is worth a whole lot of money over the years. Of course if you save 0% or something close to it, then you can make a million a year and still be screwed.

The problem with any kind of detailed calculations is the number of unknowns:

• your income and career
• emergencies you will face, whether lawsuits or ill health or children
• future government policy, for example will you get Medicare / Social Security and how much, tax rates, etc.
• real investment returns
• "glide path" of your investment returns (depression right before retirement or bubble right before retirement, for example)
• if you panic in a downturn and "go to cash" even once, or speculate in a bubble even once, you can completely destroy any calculations and assumptions you might have had...