Planning for retirement can be stressful, but we’re here to put your mind at ease! We asked Brandon Singer from Freedom Financial Group, LLC to share some insight on saving for retirement. Here’s what he had to say:
“How much should I have saved by retirement?” It’s a question we get asked all the time, and it is definitely an important one. The answer to the retirement savings question is quite unsatisfying, “It depends.”
The truth is everyone’s vision of retirement is different. The amount of money that you need to retire is based on a combination of factors such as lifestyle and healthcare expenses, investment risk tolerance, pension and social security eligibility and inflation. Planning for retirement is challenging because it is difficult to dial in some of the unknowns. However, by using great financial principles and a little educated forecasting you can be well on your way to a fruitful retirement.
The best strategy is to start as early as possible. However, saving when you are still early in your career is tough. There are a few strategies that can help you establish good saving behavior even when you don’t have a lot of extra income.
- Automate your savings: The simplest way to make saving painless is to automatically direct a portion of each paycheck into your savings and investment accounts. You’ll quickly get used to having less money to spend each month and your savings will grow automatically.
- Focus on saving a percentage of your income: Even if you can only save 5% of your income, it’s an amount that will scale as your income grows.
- Build saving into your budget: If you include your monthly savings goal into your monthly budget, you’re much more likely to stick to your plan than if you simply save whatever money’s left over at the end of the month. Along with saving, investing is one of the best ways to grow and protect your hard-earned wealth over the long term.
At the very least, take advantage of any employer-sponsored 401(k) plan matching (if one is offered). If you can’t do that, contribute as much as you can. Every little bit will compound over the next 20 to 30 years, making a big difference for your growing nest egg. Those without an employer plan should setup an individual retirement account (IRA). With a Roth IRA, you can make after-tax contributions up to $5,500 a year and earnings grow tax-free.
When you’re in your 20s and 30s, retirement can seem like a long way off. But it’s important to start saving for retirement as soon as you can. Here’s a big reason why: the magic of compound interest.
Let’s say Joe is a 25-year-old investor who makes a single $5,500 contribution to a Roth IRA. If his portfolio earns an average rate of 8% per year, that single contribution could grow to $119,485 by the time Joe is 65, even if he doesn’t add another dime to his IRA. However, if Joe waits until age 35 to start investing, that same $5,500 investment would only grow to $55,345. While this is a very simplistic example the basic principal is this: time is one of the most important ingredients to long-term investment success.
So how much of a nest egg will you need? Most experts say you’ll need about 80% of your pre-retirement income in order to sustain your lifestyle after you retire. This isn’t set in stone, and it can be more or less, depending on your situation.
If you have done any saving at all prior to your 40s, saving that much by age 50 is much easier.
Is it time for a retirement preparation checkup? The table below shows a good rule of thumb for how much of your salary you should have saved:
||You Should Have This Much of Your Salary Saved…
Should you invest to take advantage of compound interest? Putting your money to work for you through investing gives you a greater potential for return than saving alone. It’s important to understand that all investments involve some degree of risk. Understanding and managing risk is one of the most important pieces of a long-term financial strategy. Though it’s impossible to remove all risk from investing, professional investors use tools like diversification and asset allocation strategies to help mitigate some risks.
As a long-term investor, it’s important to develop a clear understanding of your goals, risk appetite and time horizon. One of the best ways a financial representative can help you is to assist you in developing a clear-eyed evaluation of risk and an investment strategy to help you mitigate it while still pursuing your long-term financial goals.
If you’re like us and you get a kick out of this sort of thing, you can run the numbers a couple times a year to keep up with how much you should be saving for retirement. At a minimum, we recommend reviewing once per year. It’s always better to adjust as you go, rather than struggle to catch up.
We hope these tips help you to be as prepared as possible for retirement. But keep in mind, it’s always a good idea to speak to a qualified investment professional before making any investment decisions.