The question about how much money you need to have saved to face retirement without financial hardship is asked by thousands of people before reach retirement age. In this way, prior to collecting this Social Security benefit, you will have an idea of how much the pension will be and in this way, you can develop a prior savings plan.
A finance expert, Natalia de Santiago, given some advice on How much should you have saved for retirement? and on this occasion he has done it in the CaixaBank ‘Financial Training Classroom’ podcast. In a video that can be viewed on YouTube, De Santiago is blunt assuring that “for every 1,000 euros per year that you lack, you need 25,000 euros saved on the day you retire.” He states that this phrase, when he pronounces it, becomes “the scare phrase” for those people who have never sat down to perform these calculations.
The starting point, he explains, is to estimate how much pension will be collected in the future. “Social Security has a simulator where they tell you what your pension will be“, he pointed out, although his recommendation is always to take the net amount as a reference and apply a cut. “We are going to multiply it by 0.9 or 0.8 if you are very young,” he points out.
Why is it necessary to do this? As a preventive measure, in case the system offers lower performance tomorrow.
The next step is to calculate the expenses that will be incurred in retirement.
Once this first point has been met, the next thing is to calculate the expenses that will be incurred in retirement. “You take today’s net income and subtract savings, spending on children’s education and the mortgage,” he explained to the podcast host. The result indicates how much money will be needed to maintain the same standard of living once you stop working and, therefore, stop receiving a salary.
The problem appears when this comparison is made, and that is where Natalia de Santiago frames this “fright phase” that occurs when “there are more expenses than income.” This gap is what is called a “hole” and must be covered with accumulated savings. The rule says that you must multiply the annual deficit by twenty-five. “And that is the amount you should have saved without counting the home.”
“Those who earn the most have it worse for retirement”
Public pensions, remembers the expert, have a maximum limit, something that does not happen with salaries. That’s why “people who earn more have it worse for retirement.” Those who earn lower salaries tend to maintain a higher replacement rate, that is, a pension closer to their payrolls.
Once the savings objective has been determined, the last step is to translate it: “whatever you get, you divide it by the years you have left until retirement,” he explains. And this figure is what allows us to know if the current level of savings is enough or if it must be increased to avoid problems.
Only in this way can you adjust your savings plan and “make sure that the day you reach retirement, everything will work out for you.” “We would have to do all of these numbers,” concludes the expert.