When it comes to how much money you need to save for retirement, plenty of big numbers get thrown around, and they're often in the millions. While those numbers seem lofty, they can be attainable if you start early, especially when you consider that you have a lifetime to save.
Experts suggest planning for 75% of your pre-retirement income each year to make for an easy transition into retirement. This budget covers everything from your lifestyle and spending choices to debt, mortgages, and expected significant expenses, such as healthcare.
To determine your expected income needs at retirement, calculate your planned spending and set expenses for when you're at retirement age. You may have your house paid off, but do you plan for more frequent travel? You may not be paying for your children's expenses, but will you be helping them pay off education costs? By determining your expected income needs, you can compare that figure to your current income to get your percentage.
The 4% rule in retirement offers a simple way to look at spending your retirement savings. Simply put, if you pull no more than 4% from your retirement fund each year, it should last at least 25 years. And if you can spend less than 4% of your retirement savings in the early years, your retirement money will last even longer.
With current inflation levels, a 5% rule may be more realistic, but also consider that your remaining funds can still be invested and accruing value.
Are you wondering what percent of your income you should save for retirement? A good rule of thumb is 15% of your paycheck. In doing this, you'll get a solid start on the path toward retirement goals. Of course, starting this 15% plan early in your career puts you in a much better position as you near retirement.
While saving 15% of your paycheck offers a good starting point, it may not get you to the 75% of your pre-retirement income threshold. Some people will rely on expected Social Security or a pension for help, but make sure the 15% rule matches your expected retirement income needs.
If your workplace offers a 401k matching program, you may not have to save all the money on your own. Employers who provide a matching program will often match at least 3% — and sometimes up to 6%. In a situation where your employer matches 6% of your 401k savings, you won't have to come up with the complete 15% of your paycheck every pay period.
If a 401k isn't available to you, a Roth IRA and a traditional IRA give individuals similar benefits to a 401k. These savings vehicles allow you to contribute money before you're taxed, dropping your current tax burden and building savings tax-free until you pull it out later in life when your tax liabilities may be lower.
If you didn't start saving 15% of your annual income at age 25, don't fret — you're not the only one. The National Institute on Retirement Security says 77% of Americans haven't met conservative retirement savings goals, and over 20% aren't even saving anything for retirement.
To know if you're on track — or just where you stand — follow this basic outline of your average retirement savings by age: By age 30, try to save one time your annual salary. By 40, two times. By 50, four times. By 60, the number climbs to six times, and by 67, you'll ideally have eight times your annual salary saved.
Don't underestimate the value of starting early in your retirement savings, even if you aren't putting away 15% of your paycheck in your 20s. The beauty of compounding interest helps you the longer you have your savings growing.
Let's consider an example: One employee saves $100 per month at the age of 25, and another employee $200 per month starting at the age of 35. With an annual return of 10%, the first employee will have $640,000 saved by age 65, whereas the second employee will have about $200,000 less at the same age.
If getting started is daunting, try the 1% savings challenge. This encourages people to bump their monthly or annual savings level by 1%, a tip that could yield a compounded benefit decades down the line.
And don't lose sight of the importance of life insurance and savings. Your retirement savings aren't just for you—your spouse may depend on these funds, and they could make a difference in the lives of your children and grandchildren. To help protect your financial legacy, find out how your income expectations impact your life insurance needs.