I am not much in love with rules of thumb when it comes to finance though their significance to the rank and files cannot be downplayed. From experience, I know everyone is not willing to research on the financial topics and they love to stick by easy-to-remember conventional rules. On the flipside, these guidelines are often not correct and outdated as well, keeping you away from fulfilling your financial goals.
When people think about saving for their after-retirement life, most of them get attracted to these conventional rules. Unfortunately, these are often claimed to be facts even though most of them are no longer applicable. Here are two obsolete finance rules as well as what you should follow instead:
$1 million will make your life comfortable
The first rule of thumb says $1 million is a nice sum to live on whereas the reality is it is no longer a big figure that it was used to be a decade ago. It cannot ensure a comfortable life for 20-25 years, particularly if you live in a posh area and enjoys a high living style.
Though it is not a hefty amount anymore, it is still a dream figure for many Americans. In fact, less than 5% of total Americans earn $1 million in their lifetime. For many, it’s so frustrating to accumulate the amount that they will give up the idea of saving at all.
What you should do: Make it a target to save eight times of your final salary. There is no easy-to-remember figure; rather things are more personalized to make the goal achievable for any worker irrespective of his/her salary slab.
Replace 80% of your last salary after retirement
It’s not an out-of-date advice. However, it’s too much generalized and you can hardly figure out how much to save for sunset phase of your life. How much you will need in your post-retirement life depends on activities during that time. If you want to travel around the world, you must have more nest eggs. If you experience frequent or serious health problems, more retirement income will be needed than what you would if you stay fit and fine just like what you used to be in your heydays.
What you should do: Figure out how much you need, depending on your present lifestyle. The conventional rule does not consider several variables in a retiree’s life, including cost of living, health issues, leisure activities etc. Take time to question yourself about what you want to do after retiring from service and how much you need to support your lifestyle.