Many people wonder about the common question of how much they should save for retirement from each paycheck. The answer depends on your retirement goals and when you plan to retire. The earlier you want to retire, the more you need to save. Additionally, how you plan to live after retirement will determine the amount of savings required. The more comfortable you want to be, the more you need to save now. You don’t want to rely solely on Social Security.
How much should I save as a percentage for retirement?
The easy answer is to save a certain percentage of your income each month. If that’s your approach, just save a specific amount each month. Most experts agree that you should aim to save 15% of your total income for retirement each month. However, if you haven’t saved anything, you can start contributing until you reach what aligns with your employer’s contribution, and then work on gradually increasing it. Another simple approach is to start putting your salary increases into your retirement fund. If you’re just beginning to save for retirement and are worried about finding the money, you can start with 5% and then raise it each year until you reach 15%.
Are there other ways to ensure I’m saving enough?
An alternative option is to calculate how much you will need once you retire. You should consider how much you plan to travel and the rising cost of living. Then you need to determine how much you need to save each month to achieve that goal. You can talk to a financial advisor to figure out how to invest that amount. When you’re in your twenties, you should focus more on contributing as much as you can since early investments will pay off in the long run. This is particularly important as the Social Security system is likely to be adjusted by the time you reach retirement age. Remember that when doing this calculation, you should consider how much your investments will earn in interest each year in addition to what you are contributing. A retirement savings calculator can help make the process a little easier.
Accounts you should use to save for retirement
You may want to consider retirement accounts that allow your earnings to grow tax-free, such as a Roth IRA and Roth 401(k). Although these contributions are made after tax, your earnings will be withdrawn tax-free, meaning significant savings in the long run. You may reach a point where you have maximized the contribution limits that can go into a traditional retirement savings account. When that happens, you should invest your money in mutual funds that earn a good interest rate. This will help in spreading your risk. Another excellent investment option is real estate, but you should only do this after you have maximized your 401(k) and IRA options.
What if I retire early?
If you plan to retire early, you may want to put part of your savings into an alternative savings account. You will incur a penalty if you start withdrawing funds from your IRA account before you turn 59 and a half. If you plan to retire before then, you will need to plan carefully and make investments you can access without touching that account. Your Social Security retirement age will be closer to 70, so you won’t be able to use those funds if you retire early as well. You should talk to a financial advisor, who can help you find the best ways to invest part of your money so you can access it before you meet your retirement savings age requirements. You should look for investments that will generate a steady income stream, either through dividends or other means. As you get closer to your early retirement goal, you will want to shift to more conservative investments to keep your money safe.
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Sources:
Internal Revenue Service. “Roth Comparison Chart.” Accessed June 20, 2021.
Internal Revenue Service. “What If I Withdraw Money From My IRA?” Accessed June 20, 2021.
Source: https://www.thebalancemoney.com/how-much-should-i-save-for-retirement-2386138
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