Welcome to Lesson 1: Retirement Savings. This is the first of three lessons (posts) attempting to determine how best to allocate our gross income.

Retirement savings is simply a function of many different variables. Bankrate.com offers an excellent calculator that show how all of these variables interact and present your retirement savings progress. Click on this link and we’ll see how this report will offer insight on how much of our income we need to allocate to retirement.

Scenario 1: Default

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This particular individual is in a bit of trouble. His current income allocation to retirement (10% of $50,000), given the other inputs, will not be enough to sustain his desired retirement lifestyle. This individual could persue a more aggressive investment strategy, but his/her best bet is to allocate more of his/her gross income to retirement. Let’s run another scenario.

Scenario 2: 30-year-old with some retirement savings and $70,000 salary

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After taxes this individual has to contribute 9% of his/her income, which is only a little bit higher than the prior individual who had a much larger retirement savings base. As you can see, being young is a big advantage. Let’s run one more case that displays an individual that will need to allocate a significant amount of gross income to retirement savings.

Scenario 3: 50 year-old with a pretty good retirement base and $80,000 salary

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With $250,000 it appears this individual is set, but this example shows that he/she will need to contribute 15% of his/her income to achieve his/her desired retirement goals. It is really important that you build your retirement base early to alleviate retirement situations like this.

So what have we learned? We learned that given our current inputs, we may have to allocate more of our income to the retirement savings category. Retirement calculators like these will be our first stop when evaluating how much of our income we need to save.

In the next lesson (post), we will evaluate how much of our remaining income we need to allocate to an emergency account.