It may sound overzealous to start thinking (and talking) about retirement now – especially if you’re in the early stages of your career — but the truth is that it’s never too soon to start. Why? Because the sooner you start, the more years you have ahead of you to prepare, and the more manageable those contribution chunks need to be.
The future tends to sneak up faster than we expect.
So how much should you be squirrelling away each paycheck? While there is some difference of opinion, and there is no one-size-fits-all approach, the general rule of thumb is that putting some money aside is always better than none.
Beyond that, in terms of what that magic number is for those expecting to retire with relative comfort, experts generally agree on the 50/30/20 rule – the idea that 50 per cent of your earnings should be going to necessary expenses like rent, groceries and the like, 30 per cent can go towards discretionary or “wants” spending and you should be putting away at least 20 per cent of your earnings towards savings and retirement.
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While in some cases, this may not always be possible (especially if you’re in the lower earning bracket or are currently focused on paying back high interest loans first), here is why the 20 per cent rule makes sense: assuming you can make enough on your investments’ interest and dividends to sustain your current lifestyle even if you stop working, you’ll need about 25 years-worth of income to live, if you plan to retire at, say, 60.
That means that you’ll have about four per cent of your total savings per year to use towards that (remember that four per cent x 25 years = your total savings sum).
Your ability to reach a sum (25 times your income) that allows you the freedom to maintain this standard of living depends, of course, on the number of years you have to save. But experts agree that if you’re putting aside 20 per cent of your savings, it will take you 41 years to hit that magic sum (see why it’s a good idea to start early?). Of course, if you need to achieve that sum in less time, your percentage will go up, just like it would go down if you have more than 41 years ahead of your retirement.
While this figure is of course imperfect, and life often throws us a curve ball (and sudden inflation can happen, raising the amount you’d need to sustain your current lifestyle), this is at least a solid starting point and guide map for future planning.