What do you dream of for your retirement? There are sure to be trips and activities you want to do to make the most of your well-deserved time off. To ensure that your retirement is the way you want it to be and not just the way your state pension dictates, you need to be clear about how much money you will need when you retire.
With that figure in mind, you can create a savings and investment plan that will allow you to reach the magic number to get you through retirement smoothly and enjoyably.
How much money will you need to retire?
The “Finance for All” portal of the Bank of Spain (BdE) and the National Securities Market Commission (CNMV) estimates that during your retirement you will need between 70% and 90% of the income you had before you retired.
This is because it is assumed that at this stage of life your expenses decrease, as your housing is paid for, for example, or you no longer have to pay for children or work-related expenses.
According to this widespread theory for calculating how much you should get when you retire, if you earn 1,500 euros a month, you can live in the same way with between 1,050 and 1,350 euros per month.
The problem with this formula, just like the one that involves adding 10 years of your salary as a supplement to your state pension, is that it is too generic. The problem is that a stress-free retirement can be a far cry from the retirement you dream of. As always, the key here is to know what your plans are and understand their cost.
How much will your golden retirement actually cost: doing the numbers
To help you understand this better. Will a retirement without travel cost the same as one that includes at least two trips a year abroad? What if we calculate half the year at home and the other half at the beach? What happens if we add a hobby?
In all of these three cases you will be retired, but your expenses will be very different in each situation. That is why the first thing is to know what your golden retirement will cost, not how much your neighbor’s will be. Here’s how to find out:
- Calculate your basic cost of living. In other words, how much do you spend on a day-to-day basis: food, utilities, mobile phone, housing, etc. A good budget will help you find the magic number.
- Calculate any unforeseen expenses. If these are unforeseen, how can you calculate them? Well, basically because not all these unforeseen events are actually so unpredictable. There are future expenses that you can plan for today, and one of those related to retirement is health. Public health is free, medicines and special issues such as home care still cost money.
- Calculate the cost of retirement you want. This is the section for travel and leisure. In other words, the lifestyle you dream of when you retire.
Add these three elements and you will have your magic starting number. There is only one more thing left: everything must be adjusted for inflation. Inflation is the effect the increase in the cost of living has on your savings.
Every time the cost of living increases, your money loses value. And why? You can do less with that money. For example, with an annual inflation of 2%, a one euro coffee will cost 1.02 euros. If you have only one euro in your pocket, you will no longer be able to have one.
That is why it is important to adjust all these calculations to expected inflation. The chart below shows projections of how much you will need when you retire, in real terms, based on the time left until retirement and your current estimates.
|How much you need per year||Rate of inflation||Number of years until you retire||How much will you need when you retire|
|30.000,00 €||1,50%||10||34.816,22 €|
|30.000,00 €||1,50%||15||37.506,96 €|
|30.000,00 €||1,50%||20||40.405,65 €|
|30.000,00 €||2,00%||10||36.569,83 €|
|30.000,00 €||2,00%||15||40.376,05 €|
|30.000,00 €||2,00%||20||44.578,42 €|
|30.000,00 €||2,50%||10||38.402,54 €|
|30.000,00 €||2,50%||15||43.448,94 €|
|30.000,00 €||2,50%||20||49.158,49 €|
|30.000,00 €||3,00%||10||40.317,49 €|
|30.000,00 €||3,00%||15||46.739,02 €|
|30.000,00 €||3,00%||20||54.183,34 €|
How much you will receive as a base: will your state pension be enough?
Using the above calculations you can find out how much you will need for your retirement per year. Do you think your state pension will be enough? To find out, you can calculate your state pension using this Social Security tool or use a simpler trick based on the pension replacement rate.
This rate marks the percentage of the final salary that you will receive as a pension. The average in Spain is 78%, so a salary of 1,500 euros would be transformed into a pension of 1,170 euros. This is, of course, as long as you have contributed the time necessary to collect 100% of your pension.
In any case, remember two things:
- The replacement rate is only an approximation. Your pension may be different depending on how long you have contributed for. To be conservative, you can subtract 10 basis points from that percentage.
- The future of the public pension does not depend on you. What might happen to the amount of state pensions is beyond your control. It is politicians who decide if they go up, down, freeze or how they are calculated.
For this reason, regardless of our calculation, it is always a good idea to save and invest to supplement your state pension. In fact, with that amount you should be able to live calmly when you retire, but not necessarily the way you want to.
The difference between the state pension and what you need is what you will need to contribute on your own each year.
As an example. Imagine that the cost of your golden retirement is 30,000 euros and that your pension is 20,000 euros. Each year you will have a deficit of 10,000 euros. If you retire at 67, you will still have about 20 years to live. In other words, you will need to add 200,000 euros in savings.
The most typical thing is that you reach your retirement with that amount already saved, or at least part of it.
The 4% rule: how to stretch your retirement savings
The 4% rule is a method used to find out how much you will need when you retire. It is based on the studies of Trinity University in the United States and is used to calculate the percentage of your investments that you can use each year without the money you have saved running out.
The name comes from the fact that at the time of the study, 4% of the money saved could be withdrawn and this would last for at least 25 years. The key to this method is that any money that is not withdrawn is invested in the stock market and generates a return. This is how you are able to stretch it out.
How to save for retirement?
Now you are clear about how much you need for your retirement and whether your state pension will be enough. The next step is to take steps to achieve this.
If you are still not saving, start doing it. In this article you can see how much to save based on your age and income.
If you save and have an emergency fund, you can take the next step and start making your savings profitable. The market offers a wide range of products to do this, from pension plans to long-term savings plans through investment funds or unit linked funds. You just have to choose the one that is most suitable for you and start the journey.