How To Save For Retirement

Most of us know we need to save for our future, but many times other responsibilities get in the way. If you’re like many other Americans, you might be struggling with knowing how to save for your golden years. Here’s some guidance on how to financially prepare for retirement no matter your age. 

How Much Money Do You Need To Retire?

Before we dive into a savings plan, you’re probably wondering exactly how much should you save for retirement. This is a great question. Unfortunately, there’s no “one size fits all” solution. How much you save for retirement will depend on many factors. These variables include your current spending and saving habits, life expectancy and lifestyle preferences for the future. While you may not be able to predict an exact number, here are a few guidelines to start with:

Estimate Your Future Income Needs And Expenses

This process may take a little time and thought, but it’s essential when determining how much you’ll need in retirement. Start by jotting down your current monthly expenses on a spreadsheet and then decide if these expenses will remain consistent or fluctuate during your golden years. You may also want to include other expenses. Consider some of the leisure activities you enjoy, such as traveling or playing golf. Since you’ll no longer have to clock in at 9 a.m. and out at 5 p.m., brainstorm how you’ll fill your time. Once you’ve come up with an idea of what you think you’ll enjoy doing, calculate the expenses of each hobby. This will allow you to come up with a rough outline of the leisure expenses you can expect. Including this amount in your projected monthly retirement expenses will help you determine how much you’ll need to support your ideal lifestyle. Next, multiply that number by 12 to get your anticipated annual income. Compare this number to how much you’re currently making and then decide the income level you’ll need to replace in retirement.

Take Into Account This Rule Of Thumb Of Saving For Retirement

Many Americans won’t do the exercise mentioned above. In fact, according to the Employee Benefit Research Institute, only 42% of savers actually calculate how much they will need in retirement. If you’re among the savers who don’t plan to estimate their retirement expenses, you can try to use a common retirement savings rule of thumb. Experts recommend reducing your expenditures to 80% of your current income. This will allow you to put 20% of your income toward your retirement savings. When you’re of retirement age, your goal will then be to continue to live at your established 80% without putting the 20% into savings. This method of savings will allow you to make a seamless transition into retirement. You can use the 80/20 ratio as a starting point. From there, tailor your actual retirement number as needed. Adjust your savings to the right amount that will allow you to have your ideal income to support your retirement lifestyle.

Try Using A Retirement Calculator

Calculating your financial needs in retirement can be consuming and cumbersome. Using a retirement calculator like the one below can help you gain a better understanding of how much you’ll actually need. If you have your retirement savings at a financial institution, they may have tools and resources you can use to determine the number you’ll need.

Reassess Regularly

Throughout your life, your goals and circumstances may change. That’s why it’s important to consistently reevaluate your calculations and adjust accordingly. It’s better to make adjustments along the way than wait until the last minute. If you feel overwhelmed, you may want to evaluate your financial goals and reprioritize.

How Much Should You Be Saving Each Month?

Now that you have an idea of how much you’ll need to support your lifestyle in retirement, you will need to determine how much you should save. According to many experts, it’s wise to contribute at least 20% of your income to retirement savings. This is considered the 50/30/20 rule, which is popular in the personal finance industry.

In order to follow the 50/30/20 rule, you’ll reserve 50% of your income for necessities (such as food and housing), 30% of your income for discretionary spending (such as entertainment and hobbies) and 20% of your income for your retirement savings. For example, if you make $50,000 a year, you’ll need to set aside $10,000 for your savings each year.

When Should You Start Saving For Retirement?

You should start saving for retirement as soon as possible. The earlier you begin, the more time you’ll have to reach retirement financial security. Ideally you’ll begin saving in your 20s when you begin receiving your first real paycheck.

Each year your money will continue to grow and receive compound interest. If you begin saving at age 28 and contribute $3,000 a year toward retirement, you’ll have $481,012.21 in 37 years (assuming 7% interest). In comparison, if you wait until age 45 to start saving (using the same contribution amounts) you’ll end up with $122,986.48 in 20 years.

This example illustrates the importance of early and consistent saving for retirement. If you haven’t started saving yet, it’s better to start now than to never start at all. Saving for retirement at any age will ease some of your future financial responsibilities.

How To Save Money For Retirement: 12 Tips

Here are a few tips on how to save money for your retirement:

1. Determine How Much To Save For Retirement 

The first thing that you'll want to do is determine how much money you'll need to retire. Some of the factors you'll want to consider may include when you plan to retire, where you plan to live, whether you plan to work part-time during retirement, etc. One way to start is by jotting down your current monthly expenses and trying to estimate your retirement expenses. That can help you get a ballpark for how much you'll need to save.

2. Start Saving For Retirement Early

You should start saving for retirement as soon as possible. The earlier you begin, the more time you’ll have to reach retirement financial security. Ideally you’ll start saving in your 20s when you begin receiving your first real paycheck.

Each year your money will continue to grow and accumulate compound interest. If you begin saving at age 28 and contribute $3,000 a year toward retirement, you’ll have $481,012.21 in 37 years (assuming 7% interest). In comparison, if you wait until age 45 to start saving (using the same contribution amounts) you’ll end up with $122,986.48 in 20 years.

3. Choose A Retirement Plan

There are many different kinds of retirement accounts, and you're not limited to only one. If your employer offers a 401(k) plan, you can contribute there as well as to an Individual Retirement Account (IRA). If you're self-employed, another option you can consider is a Simplified Employee Pension, otherwise known as SEPs.

4. Implement A Retirement Savings Strategy

While there isn't a single "best" retirement savings strategy, you'll want to come up with a strategy that works for you. Here are a few you might consider:

The 4% Rule

The 4% rule is a retirement savings rule that says that you withdraw 4% of your retirement savings balance each year. If you decide you need $40,000 a year in retirement, you can retire when you have $1,000,000 in your investment accounts. Then each year, you withdraw $40,000, and (in theory) your portfolio earns enough to make up for your withdrawal. In recent years, some experts have criticized the 4% rule as not being sufficient for many retirement scenarios.

The FIRE Method

Another strategy to consider is Financial Independence, Retire Early (FIRE). The FIRE Movement aims to help you save aggressively while you are young so you can build up enough money to retire early.

5. Track Your Retirement Savings Over Time

It can be important to project and/or track retirement savings upon reaching various milestones in life. Your retirement savings plan and goals will likely change over time. Here's a brief look at some things to consider at different stages in your life:

• Retirement savings in your 20s: In the early years of your career, it’s important to focus on adopting solid financial habits that can set you up for future financial success. The earlier you start, the longer you have to take advantage of the power of compound interest.
• Retirement savings in your 30s: Continue building good financial habits — like sticking to a budget and automating your savings. Some financial experts recommend having at least one full year of your total salary saved for retirement by this point. If you switch jobs, make sure to rollover your 401(k) to an IRA.
• Retirement savings in your 40s: In your 40s you want to focus on your earning power and make as much as possible. If you have children, you may also think about contributing to their higher education expenses by adding to a 529 plan. Experts recommend you should have at least three times your salary saved for retirement.
• Retirement savings in your 50s: In your 50s you’ll want to bump up your preparation for retirement. Even though it may be decades away, starting the preparation process now will help you better manage your finances. During your 50s you should have between five and six times your salary in savings.
• Retirement savings in your 60s: During your 60s, you’ll want to identify ways to minimize your expenses while maximizing your investments. Your 60s may dictate your financial health in retirement, so it’s imperative to maximize your money while you can. It’s recommended to have at least eight to nine times your current salary in savings.

6. Max Out Your Retirement Contributions

Many types of retirement plans have certain maximums. One retirement strategy is to “max out” your retirement contributions by contributing the maximum amount to one or more types of retirement accounts.

7. Avoid Making Early Withdrawals

Depending on the type of retirement account, you may be hit with an early withdrawal fee of up to 10%, and you may also have to count the money as ordinary income in the year that you make the withdrawal.

8. Make Smart Investments

There are different types of investments that you can make to help boost their retirement savings. It's important to diversify your investments — some investment vehicles worth considering include stocks, bonds, exchange traded funds (ETFs), mutual funds and certificates of deposit (CDs).

9. Consider Real Estate Investing

Another way to consider saving for retirement is real estate. Investing in real estate can help boost retirement savings by providing a different format of money in retirement. Rental real estate can help boost the money you have access to in retirement.

10. Stick To A Personal Or Household Budget

One of the most important things to prepare yourself for retirement is setting up a budget. Creating, maintaining or revamping a budget can help you stay on track to save money for retirement. Keep your monthly expenses less than your total monthly income, and invest the difference in savings accounts or other investments.

11. Make Consistent Debt Payments

As you prepare for retirement, make sure to eliminate credit card debt and other debt obligations. Making consistent debt payments helps improve your overall financial health and frees up more money to save toward retirement. The debt snowball method and debt avalanche method are two ways to pay off your debt.

12. Work With A Financial Advisor

There are a lot of variables and moving parts that you have to consider when saving for retirement. If you feel overwhelmed planning for retirement, the worst thing that you can do is throw up your hands and do nothing. Talk with your trusted friends and family for recommendations on a financial advisor that can help you plan for retirement.

Retirement Accounts

To help savers reach their retirement goals, the IRS has created a few tax-advantaged retirement accounts such as the 401(k). Here is a brief overview of the benefits of these accounts and how you can utilize them to maximize your savings.

401(k) Or 403(b) Accounts Offered By Your Employer

A company-sponsored retirement account is one of the easiest places to start investing for your retirement. When you contribute to a company-sponsored plan, you’ll do so with pretax dollars. If you take home a $2,000 paycheck and contribute $200 to your 401(k), $200 will go into your account and the remaining $1,800 is taxable.

In 2019, participants are able to contribute up to $19,000 annually. Once an employee reaches 59 ½ years old, they can take distributions from their accounts depending on the rules of their plan. They must pay income taxes on all withdrawals.

Many company-sponsored plans also have match programs. This means that the company will match contribution amounts up until a certain percentage. For instance, if an employee contributes 3% to their 401(k), their company may match their contribution up to 2%. This helps employees boost their retirement savings.

Traditional And Roth IRAs

Similar to a 401(k), a traditional IRA or 401(k) is a retirement savings account that allows account holders to save for retirement with pretax dollars. Once an account holder reaches retirement, withdrawal taxes are at the highest ordinary-income rate. If the account holder chooses to take distributions before they reach the age of 59 ½, they will also have to pay a 10% penalty on the money withdrawn.

With a Roth IRA, your contributions are not tax-deductible. This means that you can contribute to your Roth account with after-tax dollars. Unlike traditional IRAs, distributions are tax-free as long as you are under 59 ½ years old or are only withdrawing your contributions.

SEP IRA

SEP, or simplified employee pension, is for individuals who are self-employed or small business owners. In 2019 employers can contribute up to 25% or $56,000 of their income (whichever is less).

Simple IRA

Savings Incentive Match Plans for Employees, or a Simple IRA, allows small employers to establish IRA accounts with less paperwork. Employers must either match or make unmatched contributions to their employees’ accounts. Employees may contribute up to $13,000 per year (extra $3,000 for employees over 50 years old).

Solo 401(k)

If you’re a sole proprietor, you’re able to establish an individual or solo 401(k) plan. With this plan, you can make contributions as the employee and employer up to $56,000 and up to $62,000 for account holders over 50 years old.

Retirement Savings By Age

There are specific milestones you can measure your retirement savings by. Using these markers, you’ll provide yourself with a set of checks and balances to determine your progress on your goals. Keep them available to remind yourself what you’re working toward.

• In your 20s and 30s: In the early years of your career, it’s important to focus on adopting solid financial habits that can set you up for future financial success. These habits may include sticking to a budget or automating your savings. Some financial experts recommend having at least one full year of your total salary saved for retirement.
• In your 40s: In your 40s you want to focus on your earning power and make as much as possible. If you have children, you may also think about contributing to their higher education expenses by adding to a 529 plan. Experts recommend you should have at least three times your salary saved for retirement.
• In your 50s: In your 50s you’ll want to bump up your preparation for retirement. Even though it may be decades away, starting the preparation process now will help you better manage your finances. During your 50s you should have between five and six times your salary in savings.
• In your 60s: During your 60s, you’ll want to identify ways to minimize your expenses while maximizing your investments. Your 60s may dictate your financial health in retirement, so it’s imperative to maximize your money while you can. It’s recommended to have eight to nine times your salary in savings.

What To Do If You Haven’t Saved Enough

If you find yourself in the scary position of having less savings than you need, don’t panic. There are a few methods that will assist you in catching up on your retirement savings. You have to be willing to put in the work, though. Some of these concepts are going to seem a bit drastic.

Remember that nothing comes easy, and if you want to reap the benefits of an ideal retirement, you will have to sacrifice to get there.

Max Out Your Match

If your company employer offers a match program, max out your matching contribution. Your company is offering you free money toward retirement. You should capitalize on that opportunity. Although it may take a cut of your take-home pay, keep in mind that you’re earning money you wouldn’t otherwise be earning toward your retirement.

Increase Your Savings By 1% Every Year

Studies show that the average American has a 1% salary increase every year. This doesn’t mean you should spend your extra income. Adjust your mindset to that of someone whose salary doesn’t increase. Take the additional money you earn and put it toward your retirement savings. The 1% increase is so small you’ll barely notice the difference.

However, your retirement savings account will notice a difference. Over the course of 10 years, the money you put away will increase by 10%. This is a huge increase that you’ll accomplish by taking small, even steps on a yearly basis.

Take Advantage Of Catch-Up Contributions

Once you’ve turned 50 you’ll be able to contribute more money toward your retirement savings. Take advantage of this! Instead of maintaining the same contribution you’ve made to your 401(k), increase your allocation. The catch-up program is for people in your situation. Don’t think you’re alone if you’re behind –know that you’re like many others who need a chance to catch up.

Review Your Investment Mix

Like checking to see if refinancing your home at a lower rate is possible, review your investment mix on a regular basis. Often we become stagnant in our efforts toward these items because routine is easy and uncomplicated. Don’t allow yourself to become complacent. Review your investment mix and see if what you have currently is the best financial situation for you.

More importantly, see if there are other options that could be doing more for your savings. If you’re not sure that you’re maximizing your investments, enlist the assistance of a seasoned professional. They have the training to prepare them to help people who are in need of better options. Let them help you find one!

The Takeaway

You may feel like retirement is a distant milestone that you consider on occasion. It’s important not to allow yourself to dismiss it as something that’s too far removed from your current state. Planning and following through on your financial goals are critical to establishing a solid savings for your golden years. If you feel overwhelmed by your savings options, seek the help of seasoned professionals.

These professionals are knowledgeable individuals who will be able to provide you the appropriate guidance for your unique financial situation. Don’t allow fear of the process prevent you from working toward the retirement lifestyle you imagine. It’s never too early (or too late) to prepare for retirement. Remember, everyone’s financial situation is different and it’s best to speak with a licensed financial expert or advisor before making any major financial decisions.