How much do I need to save for retirement is a common, yet very important question you should be asking yourself. No matter what your current age is, one day you will eventually reach retirement age. The question is, will you be prepared or not?
The retirement age in USA, on average, is 62 years old. However, some may consider 67 years old the unofficial retirement age, as this is when social security benefits kick in. Regardless of what age you personally intend to retire, there are ways to meet your goals. Budgeting well, save and invest wisely and seek help where appropriate. With this approach you should be well on your way to saving adequately for your retirement goals.
How To Budget And Maximize Savings
The first step to save for retirement is understanding how control the money you have coming in and going out. If you can grasp this, then you will have a better chance of changing bad habits and creating new ones. This will set you up better for retirement. Here are the main things you need to know in order to budget and try to maximize your savings.
Know Your Income And Expenses
In order to come up with a plan, you need to know what your monthly income is compared to your monthly expenses. You must know what you are able to work with so that you can start to make smarter financial decisions. Identifying sources of income, and marking down your monthly expenses is a great start to making better choices.
Increase Your Income: Get A Side Gig
If you are falling short of your goals, or you feel that your income is not enough, perhaps you should try to get a side job. This is a good idea If your main source of income is salaried. Or perhaps you have a cap on hours worked if you have an hourly position. Try getting more income by working another job. It can be a hobby you enjoy doing that is potentially profitable. Or one of the many other potential opportunities out there in the gig market.
Change Casual Spending Habits
This may be the easiest step to identify, but perhaps the hardest to correct. Casual spending includes going out to eat, shopping, general entertainment, etc. These may seem like small expenses in the moment, but they really add up over a period of time. If you can try to be smart about daily decisions, and try to reduce this type of spending, it would work wonders for your bottom line.
Invest In Yourself
This should be number one on everyone’s list of things to do in order to retire. You must invest in yourself first before making any other purchases. Either through an employer sponsored plan, or something you set up on your own, you should be making automatic contributions to your retirement account(s). This way any money leftover afterwards is what you are able to spend casually. But funding your retirement accounts is critical to getting rolling.
Use Available Resources
There are many tools you can use to get a budget set up. If you wish to have professional advice and guidance, then perhaps a financial advisor can help you get started. If you wish to try something on your own, there are online tools and budget apps on your phone that can provide a good start as well. Whatever your preferred method is, there are tools out there at your disposal.
Types Of Retirement Accounts
If you have any real plans for retirement, you must invest in yourself as early and as often as you can to save for retirement. There are a few main vehicles you can use for retirement savings, each with their own advantages and disadvantages.
401ks are employer-sponsored retirement plans. Employees can contribute portions of their pre-taxed income to this account where it grows tax-deferred, until retirement when you start to withdraw from your savings. This is an easy way to set your contribution amount and not have to worry about making contributions manually.
The maximum allowable contribution to a 401k is $19,500 (as of 2020). Depending on the company you work for, they sometimes offer a matching percentage up to a certain point — which should always be taken advantage of. This type of investment tool lowers your annual MAGI also, which you are able to deduct contributions from your taxes.
Traditional IRAs, or “Individual Retirement Account”, are accounts that you manage yourself. Contributions to traditional IRA are also tax deferred, similar to 401k. If you qualify you may be able to deduct contributions from your taxes. You are able to open an IRA yourself from any brokerage, and begin by choosing any stocks, bonds, mutual funds, etc. that are available to you.
There is a bit more optionality with an IRA, you have many more options than with a 401k. With a 401k, the employer usually has a set number of investment choices available for the employees. Another major difference between an IRA account and a 401k is the contribution limits. As mentioned above, a 401k has a limit of $19,500 while an IRA has a limit of $6,000 (as of 2020).
A Roth IRA is similar to a Traditional IRA in that it is an individually owned and operated retirement account. They have the same maximum contribution limit, which is $6,000 (as of 2020). That may be where the similarities end however.
The main difference between the two is that Roth IRA contributions are after-tax. They continue growing tax free until you’re able to take withdrawals. Roth IRAs also have a maximum household MAGI threshold that you cannot exceed in order to contribute to the account. Another key difference is that Traditional IRAs have a requirement minimum distribution at a certain age. Meanwhile, Roth IRAs do not have such a requirement.
How Much To Save For Retirement
In order to understand how much to save for retirement, you need to have a clear cut set of goals. What is your retirement vision? How much are your expenses? Can you live more frugal, or do you want to maintain your current lifestyle? All of these questions will provide you with a basic indication of how much you need.
A general rule of thumb with retirement is to use the 4% rule. This rule is essentially when you add up all of your investments and withdraw 4% of that amount in retirement. This can be a good goal, or tool to use. If you are unsure of how much you need however in order to use the 4% rule. There are some guidelines that you can use by each age that should help you get started.
Some financial institutions recommend a set amount of money in retirement by each age. These are guidelines that are definitely not set in stone. Do not feel bad if you do not meet these amounts. They are merely suggested amounts and there are ways to catch up if you are behind. Do not look at the average retirement savings for your age group and feel discouraged. Everyone’s financial situations are different, but it is most important to take action as soon as you can. Contact a financial advisor if you feel like you need assistance getting started.