Before we go on to the question we get asked most about as we support expats, we want to show you a paper that gives you a rough estimate of how much you need to be saving for your retirement!
In the Centre for Retirement Research at Boston College, Alicia H. Munnell, Anthony Webb, and Wenliang Hou looked at how much people should save for retirement. The paper is available here – http://crr.bc.edu/wp-content/uploads/2014/07/IB_14-111.pdf
Firstly, retirement at 65 is outdated. It is possible to retire much earlier or much later, depending on your habits. Achieving financial freedom is a better way of calling it, rather than retirement. Don’t believe those people who say young people will need to work until 70+. NEED being the optimal word here. I like my job, but I don’t want to need to work until I’m 70+ just so I can become financially free or retire and spend my time how I like!
Second, there is a lot of academic research about best practices in the financial industry. Average returns are less subjective than how much you need to save for retirement, though. Some people can live a life in the garden with their grandchildren, whilst others spend even more in retirement than they do during their working lives.
Despite this, there are some best practices as the paper shows. To estimate the target retirement rates, the researchers, in their own words, “assumes that the household’s goal is to accumulate sufficient wealth to generate a level of post-retirement consumption that equals consumption immediately before retirement. The household achieves this goal by choosing an age-varying saving rate. The target replacement rate is the ratio of post-retirement income to pre-retirement income associated with the optimal saving strategy. Pre-retirement income equals labour market earnings, imputed rent, and investment returns, minus mortgage and loan interest paid, all averaged over ages between 20 and 65.
The researchers came up with the following figures:
| Income Group | Target Replacement Rate |
| All | 73% |
| Low Income | 80% |
| Middle Income | 71% |
| High Income | 67% |
This makes rational sense, regardless of the more technical reasons for the figures. Higher-income people tend to pay higher taxes before retirement, whilst low-income people are already living more simple lives and pay more tax, so cutting back too much is dangerous. It is realistic that somebody earning $200,000 could live off $140,000 in retirement, but how realistic is it for somebody earning $25,000 to live off $14,000?
Moving on the researchers focus on how much each group needs to save, and the following figures came up:
| Income Group | Required Savings Rate |
| All | 14% |
| Low Income | 11% |
| Middle Income | 15% |
| High Income | 16% |
What is immediately clear from these figures is how high they are. Many people have been advised that 10% is enough, when the academic evidence shows 10% is more like a bare minimum. With that being said, how early you start, is the key to meeting your needs after 65:
| Retire At | Start saving at 25 | Start saving at 35 | Start saving at 45 |
| 62 | 15% | 24% | 44% |
| 65 | 10% | 15% | 27% |
| 67 | 7% | 12% | 20% |
| 70 | 4% | 6% | 10% |
These figures are staggering and show the importance of starting early. A 45-year-old, who wants to retire comfortably at age 65, may have to save 44% of their income to retire!
Of course, these figures can depend on many factors. If you plan to live in a cheaper city or country, you may need far less than 70% of your previous income, even though health insurance isn’t free for Europeans and Canadians living overseas at 65+.
If you live at home or have a good job when you are young and you save 50% of your income for 10 years, you may not need to save even 10% of your income after age 45, as the rate of compounding will be huge.
Summary
- If you leave saving for retirement too late then you will have to save a significant chunk of your salary which might be unattainable.
- If you focus on saving as early as possible then you can keep the amounts low and the more you save when you are younger the better it will be for you when older.
- There are different products to increase your pot over the years and take the strain off having to save so much
- Retirement age is a myth, in opinion anyway, because they will only ever keep on increasing it
- Focus on what you can start putting away today.
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If you have any questions about savings, investments and building something that means you can potentially retire early, please email me at info@investmentsforexpats.com and I can speak to you in person to offer more guidance and answer any questions.
