Do not ask how much you need to save for your retirement, rather work out how much you can afford to spend now.
Many people find it difficult to see themselves in retirement, and to estimate how much money they will need. This pushes them into denial, and they end up with insufficient retirement savings. This paper offers a solution.
Estimate the income that you will receive until you plan to retire as well as the funds you have saved already, and then work out the level of consumption that you can support from these funds for the rest of your life. We call that the sustainable lifestyle level. If you are currently consuming more than this level then drop your consumption to this level immediately, and save the rest for retirement. Get used to this level now, and live at this level for the rest of your days.
We developed a model to estimate how much of your current income you need to save in order to get to this level. Your financial planner must estimate the expected return that you will get on your retirement savings, and the rate at which you can withdraw your capital during your retirement.
You must tell the planner what multiple of your annual income you have saved already, and when you wish to retire. Save the proportion of your income that the answer suggests. Get used to living on what is left. If you cannot sustain your desired lifestyle on this amount, then you will have will need to make more money or you will be forced to drop your living standard during your retirement years.
Guest Contributors: Johann U. de Villiers and Elze-Mari Roux, Stellenbosch University
Read the full article, Reframing the Retirement Saving Challenge: Getting to a Sustainable Lifestyle Level, in the Journal of Financial Counseling and Planning 30 (2): 277-288