How much money do you need to retire? Well, that’s the million dollar question (literally, perhaps). It’s certainly one of the most needed and difficult questions to ask when making financial planning decisions for your future. The good news, is just asking the question is the beginning of investing both money and time in your future self. Because it is hard for us to know what life will look like for us 10, 20, 30 or even 40 years from now, there are basic assumptions and formulations that can be used to begin retirement savings.
Did You Start Investing Early?
Ideally, you are a 25-year-old asking the question. Because of the beauty of compound interest, the sooner you start investing the less you will have to make up for in your later years. Investing 10% consistently out of your paycheck starting in your mid 20’s can typically yield what will be needed for retirement and make you a millionaire. This assumes that you never dip into your savings or cease investing until the average retirement age of 63. Our retirement calculator can get a good idea of where you stand in your savings and what you can do to improve your retirement outlook.
Are You Getting a Late Start?
If, however, you are like most Americans you may have a different story. Many people have accumulated a large amount of debt or may have life events that have kept them from investing early. Or, they simply haven’t known where to start. According to 2014 Gallup poll, 50% of people did not start investing until 30 years or older. Within these numbers, 14% of those surveyed didn’t start investing until their 40’s and 8% started in their 50’s. Keep in mind, these numbers do not take into account those who have not invested for retirement. So, if you fall within the category of those who start investing later in life, don’t get discouraged, you are in good company – but, don’t get comfortable in the crowd. Now is the time to start!
Other Factors to Consider When Determining How Much You Need
What age you want to retire, the lifestyle you want to have at retirement, the rate of return on your investments, and how long you will live are some of the questions and considerations when planning for retirement. Obviously, some of these factors are easier to predict and plan for than others. For example, a rule of thumb is to plan for replacing 80% of your preretirement income to keep the same lifestyle at retirement. However, if your plans for retirement involve a large change in lifestyle, you will need to adjust for that in your savings plan. You will also need to consider all sources of retirement income, their projections for growth, and solvency of Social Security. For a good estimate of that government benefit, calculate Social Security retirement income to determine how much money you will need to draw from other retirement savings.
Lifestyle Adjustments May Be Needed
If you are late to the game in your retirement planning, you might need to make some adjustments so you can squeeze the most amount of money now into your savings and investments. Typically, if you are one of the many who have waited until you could “afford” to invest, then you may be making enough money now that squeezing 20% or more of your gross earnings into an employer matched 401K or Roth IRA won’t take too much of a dent out of your lifestyle (you can use our IRA savings calculator to determine just how much you can contribute to an IRA). However, you might find that investing 20% or more into your retirement might mean making some changes to the standard of living you have become accustomed to. Playing catch up can be uncomfortable, but sacrificing now will allow a plan that will bring financial peace to your future.
What are your plans to boost your retirement savings?