Everybody takes some kind of retirement scheme at some point of time in his career. So, how much should one earmark for contributing to such a fund? Most people have a simple answer to this question: the same amount that the person with the same salary package contributes; and how did that person arrive at that specific amount? Of course, by using the same formula and following another person! You would be incredibly lucky if the first person in this chain is a financial wizard. Surely there are more scientific methods for calculating the amount to set apart for retirement than aping others in financial matters. But sadly there are no clear cut answers to the question. One cannot simply put a number, say 10% or 20% of the income, and say it is the ideal figure. The golden rule is that the more you save, the better will be the benefits.
The Savings Algebra
The basic fact one needs to understand is that saving for pension is a means to a greater end, namely, getting adequate financial support when a person does not get the monthly salary and is likely to face escalating medical bills and other expenses. So, essentially how much you save depends on how much you want to receive back in future. But this is just one aspect of investing for future.
Another aspect is that you may not be able to save as much as you would prefer, because of your present financial constraints. There are some basic expenses which are unavoidable. So, the game is finding an optimum balance between savings and expenses. Savings are not the remaining amount left at the month-end after all the expenditure has been made. Ideally, it should be the reverse.
Now let us see how we can practically calculate a likely figure of retirement savings. Most of the experts opine that a person will be able to maintain the same standard of living on 70% to 80% of the present income. This assumption is based on the factors such that lower taxes and reduced amount of the so-called work-centric expenses. To this you need to add the rate of growth of inflation. There are software tools available on the internet for calculating the rate of inflation and the real value of currency on a future date. That will provide you with an idea of how much you will need on a monthly basis after your retirement .
You would also have some other source of income like social security account (available when you reach 62) and other likely savings such as rental income. When deduct these from the monthly retirement benefit amount you have calculated, you have your target.
You can have a meeting with the accountant of your company or an independent financial advisor to figure out how much you have to save to get the monthly target of retirement benefit. In fact, if you are good at number crunching, go ahead, obtain the documents, get the figures, and hit the calculator. You can easily arrive at the figure on your own.