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How Much To Save For Retirement – The Profit First Method

Calculating How Much To Save For Retirement – The Profit First Method

When it comes to securing your financial future, few things are as critical as planning for retirement. As a business owner or high-net-worth individual, you’ve worked hard to build your wealth, and now it’s time to ensure a smooth and successful retirement. But the big question remains: Do you know how much to save for retirement? In this blog post, we’ll break down the “Profit First” method: a powerful approach to calculate and manage your retirement savings effectively.


Calculating How Much To Save For Retirement


  • Assess Your Current Financial Situation

Before you embark on your retirement savings journey, you need to have a clear understanding of where you currently stand financially. This involves analyzing your income, expenses, debts, and assets. By reviewing your financial position, you can realistically determine how much to save for retirement, and how to build your retirement savings.


  • Define Your Retirement Goals and Lifestyle

Consider the lifestyle you want to lead during retirement. Do you dream of traveling the world or enjoying a quiet life in the countryside? Defining your retirement goals in detail will help you estimate your retirement expenses, and the required income needed to support your desired lifestyle. By starting with your end goal, you can work backwards to calculate how much to save for retirement each year, so you can achieve your goals with ease.


Lifestyle aspirations: These are goals that define the kind of retirement lifestyle you desire, from travel and hobbies to home ownership and philanthropy.


Financial milestones: These are concrete financial goals, such as a specific retirement savings target or debt reduction objectives.


By setting your lifestyle aspiration goals, you can break them down into financial milestone goals. Setting rewards for yourself and working with a financial advisor or CPA can keep you accountable and on track.


  • Estimate Inflation and Investment Returns

Inflation erodes the purchasing power of your money over time, so it’s essential to factor in inflation rates when calculating how much to save for retirement. It’s also important to review the potential returns on your investments to ensure your retirement savings compound over the years (i.e. by taking advantage of long-term capital growth and dividend reinvestment plans).


  • Factor in Social Security and Pensions

If you’re eligible for Social Security benefits or have pension plans, include these income sources in your retirement calculations. They can significantly impact your overall retirement income.


  • Account for Life Expectancy, Medical Costs, and Health Insurance

Your life expectancy plays a vital role in determining the duration of your retirement. It’s important to estimate the number of years you plan to be retired for, as this will influence how much you need to save for retirement. By anticipating and calculating potential medical costs, and ensuring you have adequate health insurance coverage, you can avoid unexpected financial stress.


  • Calculate Your Financial Retirement Needs

Using the information gathered, review your personal and business income, expenses, assets, debt, and cash flow to calculate how much to save for retirement, so that you can reach your retirement goals. This figure will serve as your savings target, and can be broken down over a weekly, monthly, or annual basis.


  • Determine Savings and Debt Contributions


When calculating how much to save for retirement, allocate a portion of your income to retirement savings while also addressing outstanding debts and loan repayments. It’s important to keep working capital if you own a business, or for emergency situations. Working with a financial advisor or CPA to find the right balance between savings, cash flow, and debt reduction is crucial for your long-term financial stability.


  • Choose a Financial Advisor

It’s important to rely on a financial advisor for investment advice. A financial advisor recommends investments that align with your personal interests, whereas a stock broker is the one who executes the buying and selling of assets for a commission. Financial advisors are usually paid a flat fee or percentage to provide advice and manage your portfolio, and must adhere to stricter regulations. They can also help you explore different retirement account options, such as 401(k)s, IRAs, and other tax-advantaged plans.


  • Review and Adjust Regularly


It’s important to revisit your retirement plan regularly to check that you’re meeting your goals and savings targets. As circumstances change, adjust your contributions and investments to stay on track towards your retirement goals. Working with a financial planner or CPA can help you identify smart investments and implement effective tax-reduction strategies.


Understanding the Profit First Method


The Profit First method, developed by Mike Michalowicz, offers a unique approach to managing your finances, including retirement savings.


What is profit first accounting? 


Profit first accounting is where you allocate profits first, before paying your business expenses. By setting aside profits first (including your retirement funds), you can use the remainder of your revenues to cover your regular expenses and taxes.


The profit first method helps individuals and businesses run at a profit, rather than overspending on expenses and running at a loss, or struggling to break even.


Benefits of the Profit First method for retirement


There are many benefits to using the profit first method when calculating how much to save for retirement:


  • Improved cash flow management: By allocating profits first from your business or salary, you ensure consistent retirement contributions without jeopardizing your day-to-day operations or expenses.


  • Enhanced profitability: The Profit First method encourages you to focus on profitability, which in turn leads to increased financial resources available for retirement savings.


  • Reduction of financial stress: By using the Profit First method, it creates a structured, predictable approach to managing your finances. This can reduce your financial anxiety for the future.

Integrating The Profit First Method With Retirement Savings


The Profit First method can be seamlessly integrated into your retirement savings strategy as follows:


  1. Determine your target profit percentages for your retirement savings (usually 5-10%).
  2. Set up separate bank accounts for separate financial purposes – e.g. operating expenses, retirement funds, taxes, and other accounts as needed.
  3. Determine how much to allocate to profit, owner’s pay, taxes, and operating expenses each week, fortnight, or month, and set up recurring transfers in your online banking system.


Aligning the Profit First method with your retirement goals ensures consistency and progress toward your goals. It’s important to monitor and adjust your retirement contributions based on your changing salary or business profitability.


Long-Term Financial Sustainability and Adaptation


Retirement goals are not static; they evolve over time. As your life changes, so should your retirement plan. Be prepared to navigate lifestyle changes and adjust your goals based on the success of your financial milestones (i.e. monthly savings targets).


The Importance of Professional Guidance


It’s essential to work with a Certified Public Accountant (CPA) and a financial advisor as they can help you manage your retirement plan effectively, keep you accountable, and provide valuable insights to optimize your retirement strategy.




The significance of early retirement planning and goal setting cannot be overstated. By calculating how much to save for retirement now, you have the power of compounding on your side (if you choose to reinvest your returns). The earlier you start saving, the easier and more financially successful your retirement will be.


To find out more and to get help with calculating how much to save for retirement, book a call with our team of expert CPAs.


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Note: The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.