What Proportion of Your Income You Should Save for Retirement
Growing old is something most people do like to spend too much time thinking about. One of the major reasons why is because people often don’t know what they need to comfortably retire, or how to get there. The daunting task of getting the information should not keep you from trying to better plan your life, however. Even if you’re late to the game, there’s no time like the present to start saving for your future self.
Conventional wisdom states that a person should aim to replace 70% to 90% of your annual pre-retirement income through savings and Social Security. For example, an individual who makes $65,000 per year should expect to need between $45,500 and 58,500 per year in retirement. That’s quite the nest egg, no? It might seem like an insurmountable peak to reach, but there is a pathway there, no matter how far away it may seem.
Your goals for retirement saving hinges dramatically on several factors, but the most important factor is based on how much you think you’ll be spending in retirement. To estimate that, it’s important to think about how your spending may change as you continue to age. For example, by the time you retire, you could very well have paid off your mortgage. Adversely, your travel spending could increase. It might seem hard to plan with this kind of what-ifs, but it is important to consider what your financial life will really look like.
Another thing to consider is that once you are retired, you won’t actually have to save for retirement anymore. What that means is if you’re currently saving 15% percent of your income, you can actually live on 85% of your income in retirement with absolutely no changes in how you spend. Saving money now will help you spend more in the future!
The question is: how much should you be saving right now?
“’As much as you can’ is the standard advice,” according to CNN Money, “ Many financial planners recommend that you save 10% to 15% of your income for retirement, starting in your 20s.
“But that’s just a general guideline. This is your retirement we’re talking about, so it pays to get a little more specific by doing your homework up front. It’s a good idea to establish a savings target – one that tells you roughly how much you should set aside over time to meet your retirement goals.”
These are good guidelines to keep in mind, but it’s also important to find the number related to you. A good place to start is to find a trusted retirement calculator online and figure out how much you should put away per paycheck to get started on saving smart. Along with figuring out your savings rate, you can also adjust your retirement age to see what it would look like if you were willing to work longer to make up for saving less.
You can even plan for the future by working to predict what your money today will be worth tomorrow.
“In the advanced fields, you can customize your projected life expectancy, annual portfolio return and the rate of inflation,” according to NerdWallet.com. “NerdWallet recommends using an annual inflation rate of 2% and an average annual return of 6% pre-retirement. This assumes a portfolio of 80% equities and 20% fixed income.”
Now that you’ve got an idea for how much you need to save and how much you’re going to spend, you might find yourself coming to the conclusion that you simply aren’t doing enough. If you know that you’re not saving enough right now and don’t see a real possibility for making much more money in the very near future, one quick and easy change that you can make is to your spending habits.
Beyond that, you can even customize more specific aspects of your financial life. There’s no doubt that it’s important to enjoy life as you live it, but if you can focus on several ways to save in small ways now, it could pay off in a big way in the future.
Here are just a few ways that you can help spend less and save more no matter what your income is:
1. Put yourself on a “cash diet.” According to CNBC reporter Kathleen Elkins, she went on a cash diet for two months and gave herself just $60 a week to spend on everything she needed outside of rent and her bills. After two months, Elkins discovered that she had saved $1,000 more than she usually does. While $60 a week is fairly dramatic, it definitely gives you an idea of how much saving small now can lead to big rewards.
2. Get a side hustle. You don’t have to work two jobs, but you can definitely find a way to make a little extra money each week to either add to your savings, or give yourself more freedom to spend on entertainment and fun.
3. Automate your savings. Instead of adding to your savings account when you can, set up a monthly deposit, no matter how small, to start building your nest egg. When you start making more money in the future, add money to your monthly deposit.
These are just a few facts and tips to get started on your healthy retirement fund. The rest is up to you!