Retirement. The point of your life when you’re expected to leave the workforce, live on your savings and enjoy everything you worked so hard to achieve. It sounds wonderful, but how much money do you need to make a happy, stress-free retirement a reality?
When you’re pushing your way through college and your first job, the question doesn’t seem all that pressing. Plenty of time to worry, right? Wrong. It’s never too early to ask this question and it’s definitely never too early to start saving for your future.
Start Saving ASAP
Whether you’re 20, 35, or 50, the most important key is to start saving now. Not next year, not next pay period…. now. Time gives your money more power!
Say you are 30 years old and make $50,000 a year, but don’t have any money saved for retirement. If you hope to live on 85% of your pre-retirement income during retirement (the sum many financial advisors recommend), you need to save a total of $2 million by age 65. That’s $600 per month assuming you use strong, healthy investment strategies like stocks and bonds.
If you procrastinate just 10 more years to the age of 40, you now need to save $1,000 a month to reach the same goals. On the other hand, if you start saving for retirement right out of college and manage to save $1,000 a month, you’ll have a hefty $8.4 million retirement fund by the time you leave the workforce
It all comes down to compound interest, which lets you earn money on your money. The more you invest and the longer your money sits, the faster it accrues.
Estimate Your Future Needs
Some Americans live comfortably on $3,000 a month, while others can’t imagine surviving on less than $10,000 a month. It’s all relative to family size, the local cost-of-living, lifestyle expectations, medical needs, and numerous other factors.
In order to understand how much you should save for retirement, you need to start by analyzing your future needs:
- Itemize and add up your standard monthly expenses right now
- In a second column, list your best guess of what each expense will be in retirement (i.e., will that expense increase, decrease, or be eliminated altogether)
- Add the costs of potential retirement expenses you don’t incur now, such as that trip to Europe you’ve been promising yourself for 20 years
- Multiply your total projected retirement expenses by 12 to calculate the annual income you’ll need, then compare to your current income. How much will you need to replace?
Consider the Advice of Experts
Every financial expert has an opinion about retirement savings. The most common rule of thumb is to save enough to replace 80% of your annual pre-retirement income.
Are you saving any money for retirement right now? Let’s say you’re stashing 10% of your paycheck into a retirement account every month. That means you are living on 90% of your income, so you can probably survive on that amount of your pre-retirement income in the future as well.
It’s also wise to make use of your workplace’s 401(k) plan. Most companies match a certain amount of the money you invest in the retirement fund. Some match your contributions dollar-for-dollar, while others offer 25 or 50 cents on the dollar. Take advantage of this free money.
At the end of the day, saving for retirement is more than shoving money into an account and forgetting about it until you turn 65. You want to find investments that pay the highest returns without putting your savings at risk, but you also need to consider inflation and other factors likely to change in the years until you retire.
As long as you know a rough estimate of the amount you need to save, you can forge a path forward using prudent money management decisions.