Retirement income investing is one of the most important financial considerations you need to devote time to during your lifetime. Many people do not properly plan far enough in advance and as such end up with retirement accounts that fall miserably short of the funds necessary to live a comfortable retirement. With plenty of online calculators readily available, you should have no trouble getting started and setting some goals.
To decide on a percentage of your gross income to set aside for retirement investing, you should first establish some objectives. How much income do you think you can live on comfortably and at what age do you wish to retire? A good rule of thumb is to have an income at least equal to 70 percent of your current gross income, as many people need less money to live in retirement than during their working years.
There is no predetermined percentage of your income you must save for retirement. The amount of money you need to save for retirement will depend on your current age, the age at which you wish to retire and the annual rate of return you expect to make on your investments. A 25-year-old wishing to retire at age 65 with $500,000 will need to save less than a 35-year-old wishing to retire at age 55 with $1,000,000.
The Bloomberg Retirement Calculator is a simple tool you can use to estimate the size of your retirement account. Let's assume you are age 35 and wish to retire at age 65. You currently make $50,000 per year and would like to retire on $35,000 per year. Assuming you can earn a 5.0 percent annual rate of return, you would need $700,000 at age 65. To achieve that goal, you would need to save $10,536 per year, or roughly 21 percent of your gross income.
Many factors can change that percentage one way or another. If you start saving earlier or earn a better rate of return, the amount you will need to save decreases. However, the same holds true if you start later or earn less interest — you will have to save more. If you were 30 instead of 35, and could earn a 6.0 percent rate of return, you would need $583,333 at age 65, requiring you to invest $5,234.75 or just a little more than 10 percent of your income, a dramatic difference from 21 percent.
The key is to start saving as soon as possible and exercise discipline. As a rule, the earlier you start, the lower percentage of your gross income you will have to save. Try to start with at least 10 percent of your gross income and determine if you may be able to increase it in the near future.
Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.