How not to end up old and broke: start saving today and make the most of your savings

Imagine that your future self has the opportunity to jump in a time machine and visit you today, what would you advise yourself? One of the first things you would urge yourself to do is put away money for retirement. Because nobody wants to find themselves in a situation where they are forced to make a living with the minimum, saying no to everything that makes them happy. Without a regular paycheck coming in every month, the only way to cover those long vacations to the south of France is from savings.

The facts are straightforward – while you may live even up to a hundred, it’s rather unlikely that you would be interested in working until that age, so any spendings made between the moment you stop working will have to come out of your savings account.

Crunching the numbers

To understand how much you need to put off every month, you should start thinking about how much you plan on spending. While you can’t estimate the exact amount you need, you can try to work backwards in your calculations, starting from the approximate amount per year you’d require. To live within means, your spendings should be smaller than the income generated by your portfolio.  

2/3 rule: A rule of thumb: if you want to maintain the same lifestyle you do now, your annual retirement income should be approximately two thirds of your pre-retirement income. The assumption that you will be able to deduct one third comes from the idea that you won’t have to pay rent or mortgage. 

State pension: Depending on your country of residence, you may be eligible for a state pension. In the UK, if you’ve provided National Insurance payments for 35 years, you’re eligible to receive 9,000 GBP/year. The retirement age in the UK is 68 years, so if you’re a resident – you could include these estimates in your calculations. However, these estimates differ by country, years of social security payments and your salary level. 

25 multiplier rule: Another multiplier to keep in mind is 25. Estimate the target savings sum by multiplying the desired annual retirement budget by 25. The amount may differ depending on retirement age. 

Passive income

Make your money work for you. Any sum multiplied by 25 becomes a whole lotta money. However, if you invest your money in a timely manner, then a huge chunk of your desired retirement fund can be made up of accrued interest. 

Let’s say, you’re 30 and you want to retire at 60, with 375,000 USD in your savings account. At that rate, you’d have to save 12,500 per year. However, if you invested the same amount with an annual return of 5%, at the end of the year you’d find yourself with 13,125 USD. The next year your interest would compound.

While you’re younger there’s a good chance you wouldn’t want to put away quite as much, however, you can still start small and let the money work for you afterwards.