When you’re young, retirement seems a long way off. It can be hard to visualize how much money you’ll need. But when you’re older, you often wish you’d saved more earlier in your life. How much is the right amount to save for retirement? You’ll need to consider both the total amount you want to accumulate and the percentage of your income it will take to achieve it.
There is no one right answer to this question. Instead, a number of factors have an influence on the ideal number for you.
Your current earnings will affect how much you can reasonably save. But if you’re earning less because you’re younger, you also have an advantage to offset lower savings. The money will compound over the years, so that saving a little bit at 25 is just as good as saving more at 35. Advisors often recommend starting small and increasing the amount you save each year.
Combining your current standard of living (and what it costs) with the standard of living you want in retirement will give you another factor. For instance, if you currently spend $100,000 a year on your living expenses, and you hope to reduce those expenses by 20% in retirement, you’ll need $80,000 a year once you’re retired. If you want to travel the world in retirement, you need to save accordingly. But if you’re hoping to move to an inexpensive state or a smaller home, you won’t need as much.
The length of your retirement isn’t entirely predictable. But clearly if you retire at 62, you’ll need more savings than if you retire at 67.
Last of all, there’s Social Security. Higher earners get more benefits, but there’s a ceiling on this. Thus, high earners can expect Social Security to replace less of their income than it does for lower income earners. That means higher earners should save more. Remember also that you receive more Social Security if you retire later.
How Much Can You Save?
There’s an upper limit on what you can save in a tax-free account. For a 401(k), that limit is $20,500 annually, not counting any employer match. For an IRA, it’s only $6,000. These limits increase slightly each year. Individuals over 50 can make extra “catch-up” contributions as well.
Only a small minority of people actually max out all their retirement contributions. After all, $20,500 a year, for 40 working years, would give you over four million dollars, more than most people need to save. However, if you’re a high earner and would like to save more, you can consider other vehicles. This includes bonds, money market funds, and universal life insurance.
It’s also important to consider what you can save without neglecting other areas of your budget. Paying off debt is just as important as saving for retirement. Advisors recommend you dedicate some of your income to each. You also need to consider maintaining your standard of living. Buying a house, for instance, can be an investment as well as providing you a place to raise your children.
Ideally, you should balance today with tomorrow. Spending money freely today and saving nothing for tomorrow will leave you impoverished in your golden years. But there’s no virtue in neglecting your family’s present needs for a lavish retirement, either.
Much financial advice puts the ideal number at 15% of your income. Other sources suggest starting out lower and working to reach 15% by the time you turn 35. But any firm number is too general to recommend for everyone. Instead, you can input your age, income, and current savings into a retirement calculator and see how much your savings will accumulate by your planned retirement age. Will that be enough to live on? If not, you should increase the amount you save.
Each year, you should reassess your retirement savings and compare to your goals. The number you saved at 30 might not be enough at 40. But if your income also rises over the course of your career, you might have an easier time saving now than you did before. To be sure you’re on track, schedule an annual meeting with your advisor to look over your retirement savings plan and adjust the percentage you save accordingly.
Ask Your Advisor How Much to Save For Retirement
A financial advisor can run the numbers for your anticipated Social Security, expected retirement costs, and likely growth of your retirement fund. With these numbers, they can help you set a monthly savings goal. Not reaching the goal? They can help you work out a better budget, too.To find the right advisor to help you reach your dream retirement, contact us today. We’ll take your information and match you to a qualified professional with the expertise you need.