The mass majority of people are not saving enough for their retirement. The National Institute on Retirement Security says that over 75% of US residents have saved less than their targets, while 21% are not saving anything. Regarding retirement, you should know how much you save doesn’t matter. Just start setting something aside for old age and be consistent.
A retirement plan is intimidating regardless of your age. Young people think retirement is far off and spend their money on their current priorities. For example, if you have a student loan and monthly bills to pay, you will spend your money on other things and forget to save for your future. However, you are never too young to start saving for retirement if you have an income and save for your future.
So How Much Should you Save?
Retirement experts recommend that you should save between 10% and 15% of pre-tax income. Nothing should stop you from saving for your old age, not even a tiny income. Save whatever little you can afford. There is no specific formula to figure out the correct amount to save for your retirement.
Some of the things that determine how much you should save include:
- Life expectancy
- Your current saving levels and spending habits
- Desired lifestyle in retirement
How to Decide How Much to Save Per Month for Retirement
The sooner you put aside some savings, the better. Here are a few things to consider when deciding the proper dollar amount to put into your retirement account.
Start by estimating your future financial needs
No one wants to live in poverty during their sunset years. This means you must make investments that will give you good returns. The amount of money should earn you about 7%, but the typical rule is 4% returns on your principal amount every year. However, the 4% rule has problems because; you have to save about 25% of yearly expenses to be financially stable.
Another problem with sticking to the 4% rule, you are likely to live on less in old age. It is almost possible to find risk-free investments which can yield 4% or anything close to that annually.
On the other side, if your investments are more than 4%, you are living on less, but your retirement balance is growing. It’s a problem because you live a poorer lifestyle than you should. So make adjustments to ensure you do not save too little or too much.
Consider your current income
Before you decide how much you should save for retirement, consider your current income. You can only save what remains after paying for your basic needs. But it takes a lot of discipline to set aside some money for future use.
How does Time Impact your Retirement Savings Plan?
Time has the most significant impact on your retirement savings plan. If you are young and in the early years of your career, the little amount you set aside every year will grow substantially over the years. It is better to start small than waiting to begin saving later.
The reality is that most people cannot afford to save 15% of their monthly income. However, that will not stop you from saving any amount you can afford. But starting early always helps. For example, if you save %100 every month from the age of 25, with a return rate of 10%, you will pay more than someone who starts saving $200 at the age of 35 by the time you hit 65. This shows the power of compounding and time on investment returns. The ten years difference impacts potential returns dramatically.
Standard Formulas for Saving For Retirement
- Save an equivalent of your one-month salary at 30
- 3 times your annual salary at the age of 40
- 6 times your annual salary at the age of 50
- 8 times your annual salary at the age of 60
- 10 times your annual salary at 67 years
Another formula is saving 25% of your annual gross salary if you are in your twenties. This works because it doesn’t include other retirement savings types; it’s a combination of 401K holdings and other matching contributions made by your employer to create a solid retirement fund. If you follow this formula and accumulate to a full salary by the time you are 30 years old, you end up with the following:
- Two times your annual salary at the age of 35
- Three times your annual salary at the age of 40
- Four times your annual salary at the age of 45
- Five times your annual salary at the age of 50
- Six times your annual salary at the age of 55
- Seven times your annual salary at the age of 60
- Eight times your annual salary at the age of 65
Whether you choose to save 25% or 15% of your annual salary, you can only realize your goal if you have time and a stable income. You may be willing to save more, but hard times such as Covid19 can hinder you.
How to Boost Your Retirement Savings
You can increase how much you save without straining financially by saving monthly. Make sure you save what you can afford. Here are a few things you can do to boost the amount you set aside for sunset years.
Track How You Spend
You can use a reliable app to track your spending. You will be shocked at how much goes to waste instead of savings.
Automate Savings
Have your retirement savings sent directly to your account once the paycheck hits your account. The temptation to spend is eliminated if the money doesn’t pass through your hands. Talk to your bank and request the service.
Consider Using IRA
If your circumstances allow and you qualify for an IRA, use it to boost your retirement savings.
Start Small
In most cases, people do not have much to set aside as savings. The biggest mistake they make is not saving when earning little money. You can save as little as 10% of your monthly income. Let the small action help you get started and eventually achieve your goal if you have to.
Increase Your Savings Slowly
Once you get used to saving some money every month, increase the amount gradually. If your salary has no hope of ever-increasing, get some side hustle to boost your retirement savings. By doing so, your money goes where it will help you most in the future.
Update your Savings with every Improvement in your Career
If you change jobs or get a better salary, you should save more for retirement. Also, if you get a bonus, put some of the money into a retirement plan. Look for any change in your career and save a little more. In fact, for any new and unexpected money, save 50% of it or channel the money into your retirement plan if you have stopped paying for expenses. After retirement, you cannot work and still have a good lifestyle plus extra comfort due to advanced age. Everything will require money and what you save now determines how you live in your old age.
Regardless of your stage in life, it’s never too early or late to start saving for retirement. Many factors affect your financial life, so age should not be the main one. Just understand how much effort you need to achieve your retirement goal before you hit 65. Of course, this doesn’t stop the question of how much you should save. This question lingers on throughout your working years. Unless you know how to balance it, you save too much or too little. But you can now flip your mindset and achieve your savings goal before a comfortable old age life.
You might also be interested in: 11 Little Known Ways To Start Saving For Retirement Now
