How Much Should I Save For Retirement?
Whether you just started working or you're nearly done, it is never too soon or too late to ask yourself “how much should I save for retirement?” Always staying on top on your current finances can also help you with predicting your future needs, which is a vital tactic to figure out the best way to save for retirement for you. Those who begin thinking about how much of their paycheck to save for retirement early on, find themselves at an advantage.
However, you are never too old to start thinking about your future. Even in your 40s, 50s and beyond, we encourage you to revisit your retirement plan periodically. In this article, we’ll outline helpful tips for developing the best retirement strategy for you and your family.
Why Saving for Retirement is a Challenge for Most Americans
The retirement age in the U.S. has been increasing over the past decade. The average retirement age is 62 for those who are already retired, the expected age for current workers to retire is 64, and for those born after 1959 it is as high as 67.One out of three Americans isn’t confident that they’ll have enough money to be comfortable in retirement and one out of 12 believe they’ll never retire at all.
However, since we live on average for around 20 years more after we retire, it’s crucial that we find the answers to our questions such as: How much should I save for retirement? What is the best way to do it? How much retirement savings should I have at 30 or 40 years old? Why is saving for retirement so important?
From examining reliable data and statistics about retirement, we see that the system has its discrepancies, and many Americans still have varying challenges to face and overcome:
- 22% of workers have no idea how retirement funds work or where their money is invested.
- 60% of retirees-to-be who own an IRA or 401(k) aren’t comfortable managing them.
- 43% of workers guess how much they need to retire instead of relying on a calculator or considering their expenses.
- Only 12% out of 54% of those with a strategy to retire have written it down.
- 61% of Latino Americans and 64% of Black Americans have some retirement savings, compared to 80% of white Americans.
- 80% of retirees-to-be believe they’ll continue working even after retirement. Only 28% of them plan to do so for a monthly paycheck.
- 68% of women save for retirement, compared to 81% of men.
- 72% of workers has access to retirement benefits but only 56% are enrolled in a workplace retirement plan.
We know we can’t change any of those statistics overnight, even less just by writing an article addressing how much of your paycheck you should save. However, we're still here to help you improve your current situation by giving you actionable tips and answering some of the most common questions about retirement.
How Much Should I Save For Retirement?
The quick answer most experts give to the question “How much should I save for retirement?” is 10-15% of your pre-tax income, assuming you began to save from age 25. However, the best way to save for retirement isn’t to just think how much of your paycheck should you save but to take into consideration many other important aspects. Some of these are a matter of personal preference and not always easy to predict, such as your current and expected lifestyle for the future, or how much your investments or commodities will be worth in the next five-10 years.
If, for example, you currently live in a small town where the median price of a home is $150,000 but you want to retire in San Diego where the median price of a home is over $900,000, you’ll need to keep in mind the difference in costs of living. And that includes more than just house prices, but also the cost of food, services, transportation, gas, and utilities bills to name a few.
All of this also means that how much retirement you should have at 40 years old, or whether $500,000 is enough money to have in your savings account very much depends on your personal circumstances and aspirations. Keep in mind that nobody can tell you which amount of money will work for you to live the retirement life you want without knowing exactly what that is plus more personal details about you. The best way to save for retirement for you might not be the best for someone else, however there are things anyone can do to improve their current situation.
In conclusion, to correctly answer the ‘how much money I should save for retirement’ question, you must do the following:
1. Estimate Future Costs of Living and Income Needs
Project your future income requirements by looking at your current spending. Which of those expenses do you think you will still have after retiring? Keeping those in mind, add on top all the other expenses you might not have today but will later, including money to spend on healthcare, leisure, and travel.
2. Write Down a Retirement Plan and use a Retirement Calculator
People with a written retirement plan feel and are more prepared for retirement. It’s a fact supported by neuroscientists that writing things down facilitates making them happen. Having a written retirement plan that is easy to access, change and review at any time is the best way to save for retirement as it helps you to stick to it. Moreover, when we write something down our brain encodes that information in a way that has a greater chance of being remembered. Hence pushing us to perform actions that help us achieve our goals.
3. Open a 401(k) Plan and IRA Savings Account
Both 401(k) plans and IRA accounts can help you put aside money for your retirement with no tax on the interest and earnings over the year. The 401(k) is a type of employer retirement account while the IRA is an individual retirement account. This means that the first are offered by employers, who may match part or all of your contributions, while the second is established without an employer's involvement. Do you think you are too old to open a 401(k) plan or IRA account? Think again! As long as you don’t feel too old to work and have earned income, you should know that there is no age restriction to open either of these retirement savings accounts.
4. Contribute to an HSA to Cover Current and Future Health Care Expenses
Health Savings Accounts (HSA) contributions are made pre-tax and are tax-deductible. You can use this account to set aside money to pay for deductibles, co-payments, co-insurance, and other medical costs. The thing to remember about HSA is that you may contribute to one only if you have a High Deductible Health Plan (HDHP).
5. Consider Setting up an Emergency Fund
It is suggested that you always have set aside at least six months of living expenses for emergencies, like a car or house repair. This way, if a financial crisis arises, you won’t be tempted to take money out of your retirement accounts or resort to credit cards or personal loans with high interest repayments.
6. Revisit your Strategy Regularly
Things change and the best way to save for retirement is to always be on top of your plan. Your family might grow, or your lifestyle may change, and so then will your expenses and needs for the future. Your job might change, you could have new bills to pay, or investments opportunities might suddenly pop up. So, frequently revisit your strategy to ensure everything is going smoothly and adjust it if needed.
Remember to consult a financial adviser if you have questions or need help coming up with a financial plan. Experts are qualified to help you create a strategy best suited to help you achieve your retirement savings goals, but please be aware there is always risk with financial investment.
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