When it comes to retirement saving, most people always tell themselves that they still have time, and they can start saving later. Is this really true? Let’s look at this issue is more detail by using an example.

John graduated from university at the age of 22 and started working right away. He plans to retire when he is 62. By staying healthy, he expects to live until 82 years old. What does this mean to John? This means he has to work for 40 years before he retires, which also implies he has 40 years of time to save for retirement. He needs to fund his retirement for 20 years. Therefore, the ratio of  retirement year to working year is 1 to 2. This ratio should be the main criteria you use to determine when and how much you should save per month. For example, if John plans to start saving for retirement only 10 years later, he only has 30 year’s time to save. His ratio becomes 2 to 3.

For the simplicity of this illustration, we assume John will fund his retirement entirely from his savings, we also ignore other factors such as mandatory retirement savings, pensions and taxes.

Example 1: Retirement to working years ratio is 1 to 2.

This means John needs to save half the amount he spends monthly. For example, if John spends $3000 a month, he needs to save $1500 per month. In order to do that, John must have after tax income of $4500.

Example 2: Retirement to working years ratio is 2 to 3.

This means John needs to save two-thirds of the amount he spends monthly. For example, if John spends $3000 a month, he needs to save $2000 per month. In order to do that, John must have after tax income of $5000.

The conclusion is: If John were to start saving 10 years later, he needs to save 25% more per month ($2000 - $1500). Please note that the actual difference is bigger due to inflation and the return from investment from the savings. However, this is beyond the topic of this article. If you have not started your retirement saving, perhaps it is time to do so?

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