How much should I save for retirement?
We’ve all wondered at one time or another: Am I saving enough for retirement? How much should I be saving? How much will I need? Maybe you’ve asked friends or family members for their advice or looked for information online. A “quick” Google search on saving for retirement will generate pages of articles with opinions about how much to save, how much is enough, and other guidelines. The information can be helpful, or it can be downright confusing.
How can you decide how much you should be saving for retirement? Set your own goals by starting with these widely accepted guidelines:
Start saving now, if you haven’t already. Ideally, we would all start saving for retirement as soon as we start working to take advantage of the power of compounding interest. The longer your money has to work for you and grow through compounding interest, the better.
Estimate your personal retirement needs. No one else can determine how much you will need in retirement. Your retirement goals will be shaped by your unique answers to questions like these:
a. When do you plan to retire?
b. What kind of lifestyle do you envision?
c. What healthcare needs do you anticipate?
d. Do you have any pension plans?
e. Will you qualify for Social Security?
f. How much have you already saved?
Direct at least 15% of your income into your retirement savings (including any employer-based retirement plan match). Start early and stick with it. When you get a pay raise, designating some or all of your new salary directly into retirement savings will help you boost your annual savings percentage with money you weren’t already including in your budget. This can help you grow your savings rate to 18%, 20%, or even 25% which will help you reach your goals faster.
After age 50, take advantage of catch-up provisions in 401(k), 403(b) or other employer-sponsored savings plans and for IRAs. These exceptions to the normal contribution limits will allow you to save more in your prime earning years.
Apply these two rules of thumb when planning for the income you’ll need in retirement:
a. For retirement income, plan on 80% of what you currently earn while working.
b. To make your savings last through retirement, plan on withdrawing 4% of your retirement savings each year.
Plan to pay off your home before you retire. A mortgage payment is usually the single largest financial obligation for an individual or family. Entering retirement without a mortgage will significantly reduce your monthly expenses. If paying off your mortgage doesn’t seem possible, consider downsizing to a smaller home so your monthly mortgage payment can be as small as possible.
With those guidelines in mind, you still might feel unqualified to do your retirement planning alone. That’s ok. May people do! Consider working with a financial planner to determine your needs, develop a plan, and work toward your goals. Having someone in your corner can help you stay committed, navigate the inevitable challenges of market fluctuations, and remind you of your retirement goals when you’re tempted to change directions.
