You may have a vision of what life will be like during retirement. Perhaps you want to travel extensively or purchase a lavish home on the waterfront. Whatever your dreams are, you must have enough money to see them through and still meet basic expenses. That is why it is important to begin thinking early about how much to save for retirement. There is no magic number or percentage for how much to save, but by considering the following options you have the ability to come up with a number that is best for you and your family.
Age You Want to Retire
How old do you want to be when you retire? The younger you are, the more money you will need to fund your retirement. Not only will you have more years to spend the money, but you will have fewer years to see any invested money grow before you start accessing it. Many retirement savings calculators allow you to input the age you retire when figuring out how much to save or where to invest. The most common age for retirement is 65.
How Much Do You Want to Spend?
Consider the lifestyle you want after you retire. Do you want to live on 100% of your current income or could you be satisfied living on 50% or 70% of what you currently make? According to a 2009 study by the Employee Benefits Research Institute, most retirees see their expenses decrease by at least 19% in the first 10 years of retirement. If you remain in your current home and pay off your mortgage before retirement or relocate to a smaller home, chances are you could see your expenses reduced even more. An individual at age 30 with an annual income of $40,000 and approximately $10,000 already in savings will need to save around $3,700 a year until retiring at age 65 in order to live on 80% of that income after retirement. An annual income of $32,000 before taxes equals around $2700 a month.
Type of Investments
How you choose to invest for retirement will also effect how much you save. If you have a conservative investment portfolio which offers steady, but slow growth, you will want to put aside more money initially, since you have the opportunity to earn higher returns. For a more aggressive investment portfolio, you may not have to save as much initially, but will need to pay close attention to how much your money is growing or if you have taken any significant losses and adjust your contributions regularly. Consider the taxes on each investment as well. You may want to choose an investment option where you pay taxes in advance instead of on the growth in order to avoid extra expenses when you withdraw the money for retirement. Many retirement options also offer additional penalties if you plan to retire before age 65, so you must consider choosing other options or saving more to account for the penalties.
Other Factors to Consider
Many individuals think they will be able to avoid saving a lot for retirement and rely on Social Security benefits. However, those benefits will only provide approximately 30% of your pre-retirement income and, with the constantly evolving state of the economy, should not be relied on. You must also take into account inflation. While you may be able to live on less than your current income, you must also consider that basic expenses are likely to increase gradually as you approach retirement, so 80% of your expenses now will likely be 3% higher when you retire.
Ways to Save More
If your employer offers to match your 401(k) contributions, take advantage of the match by contributing the maximum amount that will be matched, thereby doubling your savings for a period of time. In addition, make small cuts now to add to your retirement savings so that you will not have to take more significant cuts during retirement. If you have a retirement plan that experiences average growth, those few dollars here and there could end up equaling hundreds of dollars in retirement.
Numerous retirement calculators are available online to help you figure out how much you need to save. All retirement calculators will take into account your current age and the age you wish to retire. Some may ask you to input the percentage of your current income you want to live on, while others will use a default 80%. If you want a basic estimate, use a simple calculator that only uses these factors. For a more detailed estimate, choose a complex calculator that includes different types of contributions and compares investment strategies.