In this lesson you will learn 💸
- How much you need for your emergency fund
- How to plan with the 50-30-20 rule
- How to estimate how much you might need for your retirement
How much should I put aside for what?
One way to take a shortcut is the so called 50-30-20 budgeting and financial planning rule popularized by Senator Elizabeth Warren in her book, All Your Worth: The Ultimate Lifetime Money Plan.
This rule suggests that you:
- spend up to 50% of your after-tax income on must-have needs and obligations such as groceries, rent, insurance etc.
- spend up to 30% on things that are not essential, but that might make your life enjoyable. We call them treats. Things like dinner and movies out, vacations, that new handbag, the latest electronic gadget...
- try to allocate 20% of your net income to your future savings and investments including your emergency fund and repaying any debt.
How much do I need to put aside for my retirement?
Unfortunately there isn’t a perfect answer as it all depends on individual circumstances.
- Your current lifestyle and the life you want to have in retirement
- When you want to retire - is it the official retirement age, sooner or later?
- Your life expectancy
- Your current situation and if you are facing any retirement gaps
- If you are saving or investing your retirement money
Here are some approximates to help you to take a rough estimate.
Approximates to estimate your retirement amount
You can use the ball park recommendations such as the 50-30-20 rule.
You can use a retirement calculator from the internet, or the SmartPurse retirement and investment calculators.
You can calculate with some simple assumptions as follows - we show for simplicity reason a UK example here:
- Target: 50-70% of your working income
- Subtract: state pension
- Total amount: multiply by years you expect to be retired
- How much to put aside: divide the amount needed for your retirement by total no of years you plan to be working = amount per year you need to put aside
Meet Jane 💁♀️
Jane is 30 years old today and makes no additional pension contributions. She earns £30,000 per year and wants to retire on her 67th birthday.
How much does Jane need to put aside each year?
- Target: 70% of her working income (0.7 x £30,000): £21,000
- Subtract state pension: the full new state pension is £ 185.15 per week: £ 9,627.8
For simplicity reasons we assume here that Jane get's the full state pension.
In Janes case, she now needs £21,000 - state pension (£ 9,627.8) = £ 11,372.2 per year
- How many years will Jane be in pension: she retires at age 67 and has a life expectancy of 83 years = 16 years
Janes total amount therefore is: 16 x £11,372.2 = £181,955
- How much does Jane need to put aside each year: she has 37 years to work - £ 181,955 / 37 = £ 4,918 per year or £ 409.8 per month (approx. 16% of her income)
Please note: in our example, Jane does not invest her money. So this is a simplified calculation to show you how you could estimate your amount.
When it comes to pensions, you might want to get personal advice from a specialist, for example a pension planner or a specialist voluntary service.
Calculate how much to put aside each month
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