Determining the Ideal Salary Allocation for Your Retirement Fund

By: King San Josè Santos, RFP , CFC, CTA, FIFC

Chief Financial Planner | SJ&P Wealth Advisory

Planning for retirement is key to achieving financial security, yet many people struggle to decide how much of their salary to set aside for retirement savings. Figuring out the right salary allocation is essential for developing a solid retirement plan that provides the financial freedom you want during your golden years. In this blog post, we will explore effective strategies for determining your salary allocation for retirement and highlight the important factors you need to consider.

Why Retirement Planning Matters

Retirement might feel far away, especially for younger workers, but starting to save early can have a huge impact due to compound interest. For example, those who begin saving just 10% of their income at age 25 can accumulate significantly more than those who start at age 35 or later. Adequate planning not only affects your finances but also shapes your lifestyle in retirement.

Failing to save enough could lead to financial stress later in life, especially if you rely only on Social Security or a pension to cover your expenses. By aligning your salary allocation with your long-term goals, you can ensure a secure and enjoyable retirement.

Key Considerations building your retirement fund

When deciding how to allocate your salary for retirement, several key factors should be taken into account:

Current Age

Your age is one of the most important factors influencing your salary allocation. Younger individuals can generally set aside a smaller percentage of their salary, as they have more time for their investments to grow. For instance, if you are 25, contributing just 10% could be sufficient, but if you’re nearing 50, you may want to increase that contribution to 20% or even more.

Retirement Goals

Think about what you want your retirement to look like. Are you planning to travel the world, dive into hobbies, or downsize your living space? If you want to take expensive vacations or maintain a high standard of living, you might need to save more. Studies show that retirees often need around 70-80% of their pre-retirement income to sustain their lifestyle.

Lifestyle Expectations

How do you envision your life during retirement? If you hope to maintain your current standard of living, your savings allocation needs to be higher. Conversely, if you plan to live more modestly, you might require less.

Projected Expenses

It’s vital to create a detailed estimate of what your future expenses will be. Factors to consider include healthcare costs, housing, travel, and daily living expenses. Research suggests that healthcare can consume about 15% of a retiree's budget, so it’s essential to factor that into your savings plan.

Suggested Allocation Percentages

While there is no universal percentage for salary allocation, financial advisors often recommend the following guidelines:

10-15% for Early Career

For those starting their careers, setting aside 10-15% of your salary into retirement savings can lay a strong foundation for future growth. Starting early allows you to capitalize on compound interest, which can significantly increase your savings over time.

15-20% Mid-Career

As you advance in your career and your salary increases, think about raising your allocation to around 15-20%. This adjustment can help you catch up on savings if you started later and boost your retirement fund.

25% or More as Retirement Approaches

If you're close to retirement and haven't saved as much as you’d like, consider allocating 25% or more of your salary toward your retirement fund. This increased contribution can greatly enhance your financial security for your golden years.

Types of Retirement Accounts

When planning your salary allocation, it’s essential to understand your retirement account options:

Employer-Sponsored Plans

401(k) plans offered by many employers come with matching contributions, which can help boost your retirement savings significantly. If your employer offers a match, try to contribute enough to maximize this benefit, as it essentially provides free money for your retirement.

Health Savings Accounts (HSAs)

HSAs can be a valuable tool for covering medical expenses tax-free. Allocating funds to an HSA not only gives you tax advantages but also ensures you have money set aside for healthcare costs, which can be substantial for retirees.

Adapting Your Allocation Over Time

Your financial situation and retirement goals may change, so it's crucial to regularly assess your salary allocation. Major life events, such as marriage, having children, or a career change, can influence your financial needs.

Annual Review

Make it a point to review your financial situation each year. During this evaluation, consider changes in expenses, shifts in income, and updates to your retirement goals.

Professional Guidance

If managing your retirement strategy feels overwhelming, consider seeking help from a our Certified Wealth Manager. Their expertise can provide personalized strategies that align with your unique situation and objectives.

Understanding Compound Interest

A vital aspect of retirement savings is grasping how compound interest works. The sooner you start saving—even small amounts—the more your money can grow. For example, if you save Php 20,000 a month starting at age 25 with a 7% average annual return, you could end up with around Php 28,000,000 by age 65.

Building a Balanced Portfolio

When allocating to your retirement, it's important to diversify your investments. A balanced portfolio often includes stocks, bonds, and other assets to mitigate risk while promoting growth. It is best to consult to a highly qualified professional.

Tip: Engaging with a consultant who charges for their expertise, rather than selling a product, is often an indicator that you are working with a qualified professional.

Assessing Risk Tolerance

Your risk tolerance should guide your investment choices. Younger investors may favor more aggressive options, while those nearing retirement might focus on safer, more stable investments.

Rebalancing Periodically

Regularly review your investment allocations and adjust as needed to align with your retirement goals and risk tolerance. This proactive approach can enhance your long-term savings growth.

Final Thoughts

Figuring out the best way to allocate your salary for retirement is a crucial step toward achieving a comfortable and secure retirement. By evaluating your age, setting clear goals, and considering your projected expenses and lifestyle expectations, you can make informed choices about your savings.

Following the recommended allocation percentages, utilizing employer-sponsored retirement plans, and leveraging compound interest can dramatically affect your financial success. Regularly updating your strategy will help keep you on track to meet your retirement needs.

Start planning and saving for your retirement today. The earlier you take action, the better prepared you will be for this important life transition.

Illustration of salary allocation strategies for retirement savings