Most people don’t think of retirement when they are young, and that is a problem.
The earlier you start investing in your savings account, the less you will worry later about the amount of money needed to retire.
Most experts suggest saving $1 million as the average amount needed to retire, but this number can vary depending on who you ask. A better estimate is to save 80% of your annual pre-retirement salary so you can live comfortably after.
Unfortunately, 75% of Americans have retirement funds that fall short of their savings target.
If you’re wondering, “How much do I need to save for retirement?” now is an excellent time to start evaluating your expectations and goals for the elderly life.
How Do You Plan To Spend Your Retirement Dollars?
Retirement researchers can provide you with a percentage of your salary or an estimated amount that you should save until you reach the retirement age.
So, what is the right amount for you?
The answer depends on multiple factors, including the lifestyle you plan to have after your retirement.
This is why even retirement researchers cannot agree on a specific total dollar amount.
To determine precisely how much you need to be saving, consider your current age, the age at which you plan to retire, and how much you want to be able to spend in retirement. For example, if you plan to travel or pursue an expensive hobby, you might need to save more.
Additionally, it would help if you looked at the typical life expectancy in your family to pinpoint how long you’ll have to spend the money and ensure that you have more than one source of retirement income.
Eventually, the ideal size of savings depends on your spending habits – both before and after retirement.
How Can You Save Over The Years?
The most efficient way to ensure that you have a steady inflow of income even after you retire is to save consistently over the years, rather than setting up a retirement fund much later.
If you often ask, “Am I saving enough for retirement?” consider implementing the following:
Stow Away A Percentage Of Your Salary
Instead of focusing on a number, make all your savings in relation to your salary.
Start by saving 15% of your gross salary and attempt to have the same amount as your annual salary in savings by the age of 30.
If you want to retire by 62, start following the 15% rule at age 25. Similarly, if you want to retire by 65, start following the rule at age 35. However, remember that the rule assumes you need 55%-80% of your pre-retirement salary to live comfortably.
If you think you’ll have additional expenses in your retirement, save more than 15% of your gross salary. It’s as simple as that.
Use The 4% Rule
An easy way to estimate how much savings you should have is to follow the 4% rule.
This means that if you aim to save at least 80% of your pre-retirement salary, you should divide the number by 0.04. So, if you earn $100,000, 80% of it is $80,000.
Dividing 80,000 by 4% gives you $2 million, which is the amount of money needed to retire.
This is a valuable strategy to employ because it assumes a 5% ROI after taxes and inflation. It also doesn’t account for additional retirement income, which means you will save beyond what social security equips you with. Lastly, the 4% rule considers your current lifestyle and assumes you will be living a similar lifestyle after you retire.
But remember, to benefit from the 4% rule, you need to follow it consistently every year.
Get An Investment Account
54% of 401(k) retirement plan participants tend to put retirement funds in a savings account rather than investment accounts.
Although savings accounts are essential, the problem with this strategy is that savings accounts tend to pay lower returns than investment accounts. So, when you’re young, you should explore investment accounts, such as IRAs, brokerage accounts, and HSAs.
However, if you put your money in investment accounts, make sure to check or update it regularly.
Start Saving Early On
You should start saving as early as possible – ideally in your 20s.
Start your emergency fund with three to six months of living expenses. In addition, if you plan to start a family, set up educational savings as well so that you can avoid using your retirement savings to pay for college.
Over the years, invest in retirement savings; make sure you are enrolled in an employer-sponsored retirement plan.
How To Catch Up If You Don’t Have Enough Savings For Retirement
The earlier you start saving up for retirement, the more money you will have to enjoy a comfortable lifestyle when you stop earning. But if you’re unable to save early on doesn’t mean you can’t catch up.
Investing any amount at any time allows you to benefit from compounding as your money will multiply over the years. So, if you’re slacking behind on your savings, here are some ways to catch up:
Make Use of Your Social Security
Social security alone isn’t enough, which is why you need to set up a retirement fund. However, combined with your savings, social security provides you additional money you need for a convenient lifestyle.
Make sure to register yourself for social security at the time you are required to. Also, confirm the validity of your social security number and make sure you are eligible for it as soon as you retire.
Find Seasonal Work
If you barely have any savings and you’re about to retire, it’s time to set aside as much money as you can in savings.
If that means additional work, then do it if you’re able to. For this reason, explore seasonal employment around the holidays to increase your annual retirement savings rate.
Cut Down On Expenses
If you’re looking to save more, you need to cut down on your expenses.
Start tracking your spending habits and consider getting on a budget. Moreover, try to lower your housing expenses and cut any additional costs that you can.
Check The Progress Of Your Savings Regularly
Make sure you are updated on your savings to prevent any last-minute surprises.
If you’re confused about how much money should you retire with, retirement calculators are a useful tool to check your savings and see if there is a gap between what you have and what you’ll need when you retire. This way, you can strategize accordingly.
Saving for retirement is crucial to ensure a convenient lifestyle after retirement. So, make a note of the standard of living you aspire to have after retirement. Then, start saving for it, following any of the rules mentioned above to fulfill your expectations.
Just like the average American, if you start saving at the age of 27, you don’t need to worry. However, if you’re starting a little later, you can still achieve your desired savings if you plan and strategize accordingly.