Figuring out how much money you will need when you retire is a commonly asked question and one of the most difficult ones to answer.
To answer it, you need to consider two things: how much will you be spending during retirement and how long your retirement savings should last.
How much will I be spending during retirement?
Your spending habits during retirement are expected to be different from your spending habits while working. Some of your costs, such as transportation and housing, will likely go down. You will no longer need to commute to work, saving on car maintenance and fuel costs, and you will probably pay off your mortgage before you retire or even downsize your home. Other costs, such as
70% - 80%
of last salary is the income required for a comfortable retirement
healthcare and leisure, are likely to go up though. As you get older, you will likely see your healthcare costs rising and since you will have more free time, costs associated with hobbies and travelling are also likely to increase.
How much money you will be needing really depends on your lifestyle, but studies reveal that a pension income of 70% - 80% of last salary should provide for a comfortable standard of living during retirement. For instance, if the last monthly salary is €2000, the retirement monthly income should be at least €1400.
How long should my retirement savings last?
Some guidelines to help you out
The age you plan to retire can have a big impact on the amount you need to save. Delaying retirement
18 years is how long your savings should last
gives your savings a longer time to grow and you’ll have fewer years in retirement to spend it. On the other hand, choosing early retirement means that your savings have a shorter horizon to grow and they will need to last you for more years in retirement. In Cyprus, the average individual retires at 65 years old and with life expectancy now at around 83 years1
, the average Cypriot should plan to spend around 18 years in retirement.1
If you are still finding it difficult to find the answers to these questions, there are a couple of commonly used guidelines to help you out.
The 15 percent method:
Based on this method, if you start saving 15% of your income from the age of 25, you should have enough to maintain your standard of living during retirement. Following this method, you do not need to worry about achieving a particular retirement goal, just save an amount of money over the years and let it grow. However, if you begin saving later in life, you will have to consider saving a higher percentage of your income. This is estimated as 18% if you start saving when you are 30 years old and 23% if you start saving when you are 35 years old.
The 10 times method:
This method indicates that in order to have enough for a comfortable retirement, you should aim to save 10 times of your annual salary at age 65. To help you stay on track, you should aim to save at least 1 time your annual salary at age 30, 3 times at age 40, 6 times at age 50 and 8 times at age 60.
1 Source: Eurostat, as at 2016