Whether it’s fast approaching or a distant goal, you’ve probably asked yourself this question: how much should you save for retirement? In the current context of reform, this question is of even greater concern to the citizens, who wonder if what they are owed today will really be what they will receive tomorrow. We explain how to determine the amount needed for your retirement and how to optimize your income.
To find out how much money you’ll need in retirement, follow these instructions:
- Determine how much you need per month
- Calculate your future pension
- Depending on the result: save or invest your money
- Get the right mindset
How much will you need?
Before knowing how much you need to save to live your retirement to the fullest, the first step is to analyze your current expenses.
Calculate your expenses
For this first step nothing could be easier: you need a pen, a sheet of paper and your banking application.
You will have to write down each expense, each use of your euros qualified as essential. Generally it is about :
- Rents & charges
- Credits or loans
- Food shopping
- Bills (internet, electricity, gas…)
- Expenses related to daily needs: gas, clothes…
You don’t have to account for hobby expenses or what you put aside for savings.
Don’t hesitate to use a kakebo to help you with these calculations, it is a small account diary that you can keep on a daily basis.
The idea is to come up with an amount, as precise as possible, that corresponds to a sum that you cannot reduce: it is the bare minimum to ensure your current lifestyle. You need to keep this number in mind.
Now determine how much money you need each month to cover your leisure activities: movies, occasional shopping, restaurants…
Stay within a reasonable range. The goal is to be as close to reality as possible: everyone needs to have fun and let go, so review your estimates if you think that 100€ per month will be enough.
Discover our article: how much to save per month?
Anticipating the future
Now that you know what you absolutely need, you need to translate that estimate into the future.
And yes, the lifestyle you have today will not be the one you have tomorrow.
Even if you find it difficult to estimate the cost of your retirement life (especially if you’re still very young), it’s essential to do this exercise to get a clearer idea of how much income you need to save.
To help you with your forecast, consider these points:
- Children: do you have any? Do you plan to have any? Children are a major expense.
- Health: Even if you’re healthy today, health-related expenses will inevitably increase as you age.
- Taxes: you will probably earn more as you approach retirement and your wealth will grow, so you will be taxed more.
In general, the prices of many goods and services are increasing every year, we can only notice it today: energy, real estate… The current trend is not towards a decrease in prices. This may not be the case at the end of your career, but it is better to be cautious and estimate that these costs will be more important.
Simulate the amount of your future retirement
The second step in answering the question of how much money you should have saved for retirement is to simulate your future retirement.
Tools to simulate your retirement
To make a simulation without taking too much head with calculations, several tools exist like the retirement simulator.
Several other sites exist but these three are the simplest.
Another, much simpler way is to use the following calculation: a worker born after the 1960s will receive about 60 to 70% of his or her salary.
Nothing very precise but it allows you to make a quick calculation and to have an idea of the total amount without going through tedious simulators.
Example : you earn 2200$ of salary 2200 x 0,70 = 1540$.
Your pension will be about 1540$ if we consider the high range of 70%.
Provide for a discount?
Although successive governments want to reassure us that every person will have the right to a pension, we are forced to note that the pensions granted are decreasing more and more.
See the official state document on the financial status of the pension system for more information.
This is not surprising in itself, as our pension system is a pay-as-you-go system: active workers contribute to pay for citizens who no longer work.
Initially very efficient at the time when there were 4 working people for every retiree, the system is now running out of steam: today it is considered that there are only 1.7 working people for every retiree…
The population is aging, the demographic growth is in free fall, it becomes very complicated to continue using this financing system.
Keep this in mind: despite the governments’ appeasements, their ability to reassure about inflation (your pension will be indexed to inflation), the pay-as-you-go system is bound to weaken until it disappears if we don’t find another income to finance retirement pensions.
Increase your retirement: save and invest
You now need to get a clearer picture of whether the pension you are owed is going to be enough to live on or whether you need to look at alternatives.
Depending on your situation, there are 2 possible answers: save and invest your capital.
Saving and setting aside for retirement
This is the first answer to consider. Normally, if you are a fairly conscientious citizen, you are already likely to be putting money aside every month.
The idea is to determine if the amount you put aside is sufficient, and especially if the investment selected is interesting.
For example, if you start saving 200$ each month during your 40 active years in a classic savings account that will earn 2% annual interest, you will have 146 089$ when you retire.
That’s a lot of money!
However, a quick calculation shows that 146 000$ is not necessarily enough to finance your retirement.
Let’s assume that you have 25 years left to live once you retire. 146089 / 25 = 5843$ per
This amounts to 486$ per month.
Is it enough to cover all your expenses once this amount is added to your pension? Do the math! Maybe it is, maybe it isn’t, depending on the calculations above.
From there, you can decide to save a higher amount each month, or switch to investments that pay more! This is what we will see.
Investing to have more money saved for retirement
If saving isn’t enough to have enough money set aside for retirement, you’re going to have to find an alternative way to make your savings grow.
The solution lies in investment. Instead of letting your income sleep on bank accounts or passbooks, which are certainly low-risk but low-return, you will select investments that yield more.
Stock market and stocks to build a comfortable retirement
When we talk about investing our capital, many people think of the stock market but few people really master the subject and have money invested in the stock market.
However, the stock market and the financial markets in general are an interesting option for
save money for retirement.
If we look at the returns generated by the stock market over the last few decades, the returns on investment are very good, even more so on a long-term investment horizon.
You can see it on this graph: over 10 years, the french index CAC40 for example, has performed almost 100%!
Of course, shares are riskier than a traditional investment and the volatility is important: we regularly encounter strong upward and downward movements (we can clearly see the one linked to the 2020 crisis on the graph), but in the long term the share market has good performances that correctly value your capital.
Another advantage of the stock market and shares: they absorb inflation. While your Livret A will suffer from the full force of the increase in prices and the cost of living, the stock market is totally impervious to inflation since the increase in prices also translates into an increase in stock market values, increasing the value of your capital.
Investing in real estate to increase your wealth
Here’s a more popular option when it comes to investing your money and saving for your golden years: real estate.
Investing in real estate is one of the preferred and privileged investments : a saver with a lot of capital at his disposal will naturally think of investing in a house (whether it is a main residence or not).
This is a very efficient method if the investor decides to continue investing throughout his life: buying real estate, letting the tenant pay back the loan via the rents allows, in fine, to recover a passive annuity once retired, without any particular effort.
With a market that has been rising structurally for several decades, the value of your property is appreciating and so are the associated rents.
Again, as always in investing, the earlier you start, the better your chances of making the best trades.
Dynamic life insurance
Contrary to what many people think, a traditional life insurance contract (which will be recommended to you by your banker or broker), made up of euro funds, is not an alternative investment: euro funds are based on government bonds, which are by definition non- risky and have low returns.
On the other hand, the product itself, namely life insurance, remains a relevant investment for a person seeking to save for his or her retirement, provided that it is properly constituted.
To do this, you must opt for a dynamic life insurance, with investments in units of account. In concrete terms, these are securities indexed most often on the stock market or on more volatile financial products (therefore more risky) offering higher returns.
If you want to weight your risk, you can build a life insurance policy that is both composed of euro funds and units of account, this way you have an investment moderately exposed to risk.
Retirement Tips: Get the Right Mindset
If you are a bit lost with all this information, there are several things you can keep in mind that will act as a guiding thought.
The changes in France and in the world are accelerating and it would be a bit simplistic to think that it is not necessary to think about the money to put aside for retirement.
Forget the traditional retreat
This is the most pragmatic advice we can give you: assume that you will not receive your pension.
It’s unfair and terrible to realize but it’s the most believable scenario.
The current pay-as-you-go system is coming to an end and, as we explained earlier, it becomes inefficient when there are not enough active people to finance the pensions of the retired.
From the very beginning of the system, the competent authorities had identified this problem, which would be unavoidable if the population growth and the number of workers decreased.
This is what has been happening since the end of the thirty glorious years in France: the population is aging, young people are working later. The pay-as-you-go system is doomed to disappear. No one knows exactly when this will happen, it may be after your retirement if you are lucky. When in doubt, be pragmatic, consider that you will have nothing and act accordingly!
Think like an American
Those who know the United States will reply that there is also a pay-as-you-go pension system for Americans. This is true.
However, any serious American who cares about his or her finances absolutely does not rely on it to support him or herself for 2 reasons:
- Pensions are low
- You have to stop working very late to get a decent amount
As a result, in the United States, a large part of the population is building up their own retirement, notably through pension funds (which reach colossal amounts).
The idea with these pension funds is to offer all savers several products and/or investment supports, more or less risky and remunerative, where each citizen can deposit and delegate his capital.
Once the retirement age is reached, the saver can recover the amount and the capital gains generated to finance his expenses.
If you are advised to think like an American, it is typically because it is ingrained in their culture: they rely only on themselves and not on public benefits.
Work after you retire
Finally, the last option you can consider, which will certainly be the least sexy for most of you, is to postpone retirement and continue working.
If you have nothing to save or not enough to make the amount worthwhile, then you have no choice but to continue working.
In relation to this observation, the phrase from Confucius should come to mind, “Choose a job you love, and you won’t have to work a day in your life.“
If there is still time for you to change jobs and reorient yourself, don’t hesitate for a second: we spend most of our lives working while waiting for a retirement that may not be the one we hoped for financially speaking. If you want to work later, choose a job you like!
Retirement Tips: Get the Right Mindset
How much is a comfortable retirement?
The amount of a comfortable retirement depends on individual needs and spending habits. There is no set amount.
How do you know if you’re making enough money for retirement?
It is recommended to aim for a replacement rate of 70% to 80% of the last salary received before retirement for a similar standard of living.
What is the average savings of people at age 60?
According to a 2020 study, the average savings of people at the age of 60 is about 125,000 euros.
Be clear: the current system in France will not be able to work as it used to. It’s time to think like an American and start saving your income and then investing it yourself so you can enjoy your future retirement.
Check out our other articles on savings:
- How much to save per month to buy a house?
- The 50 30 20 rule for effective savings
- How to manage money as a couple?
Passionate about savings and investment topics. I modestly try to offer you simple, sometimes not so simple, solutions to beat inflation.