Saving for retirement is a good thought but it requires the kind of long-term planning that may be daunting to put into practice, especially when there is uncertainty about how next week, next month, and next year look. If you found yourself in this situation then, breaking down your savings goals by age may help your total retirement savings goal and it feels more manageable. Now the question has arisen that how much to save for retirement? So, in this article, we will discuss it all.
Who doesn’t have a retirement dream? Maybe yours is as simple as sleeping late or riding your bike on a sunny afternoon, or as daring as jumping out of a plane at age 90. Living your retirement days as you want means you should start saving today and save enough so you don’t have to worry about the money in the retirement time.
The key point to saving money for retirement is to start early and delay retirement. Now, here are the full guidelines about how to save for retirement, how to save early, and how much to save according to the age you want to retire. So, let’s begin.
How much to Save for Retirement at an Early age?
Saving at an early age can be useful to get an overall picture of what’s ideal when it comes to retirement saving goals. Experts have various approaches to the common question that has aroused that how much to save for retirement in total. Investment firm Fidelity recommends that you save enough to cover 45% of your gross income per year since the rest of your income in retirement will likely come from social security.
For example, if you earn $50,000 per year currently then plan to save enough by retirement age to cover $22,500 in expenses each year you are retired. There may be many elements that can affect this calculation, including the age you plan to retire and the kind of lifestyle you want after your working years.
It may be difficult to plan using raw numbers since your income and standard of living can fluctuate over your lifetime. Fidelity has created some savings guidelines that track your income, and rather than a total savings goal, so that you may identify retirement readiness decade by decade. Here are some fidelity’s recommendations:
- Age 30: by age 30, have the equivalent of your current annual salary saved. If you earn $50,000 then you should have $50,000 saved for retirement at this age.
- Age 40: by age 40, have three times your annual salary saved. If you earn $50,000, you should plan to have $150,000 saved for retirement by the age of 40.
- Age 50: six times your annual salary saved.
- Age 60: eight times your annual salary saved.
- Age 67: ten times your annual salary saved.
When saving for retirement, what to consider?
Guidelines can be convenient for planning because the reality of saving for retirement will change substantially from one person to another person. Let’s understand it by some example: if your spouse is 10 years older than you are then you may stop working full time as soon as possible so you can join them in retirement. And if your spouse doesn’t earn income from work then you may need to save more to ensure a comfortable retirement for both of you.
You may be in good health and enjoying your work which means that you will retire later than the typical retirement age of 67. Or maybe you can plan to substantially reduce or increase your standard of living in retirement which may affect the amount you should save currently.
Many factors, including your wealth and health, the economy’s strength, and your employment situation are largely out of your control. It means you can do your best to save and still feel behind compared with where you did prefer to be. However, it’s possible to increase your savings rate if necessary and get help from experts if you need it, such as a financial planner or a nonprofit credit counselor.
How to save for retirement at an early age?
Fidelity’s saving recommendations assume that an individual has saved around 15% of their annual income every year since age 25 and that they want to invest 50% of their retirement savings in stocks. Just start saving for retirement as early as you can. This will allow you to take greater advantage of compounding. Now, what is compounding? Then compounding is anything that allows you to earn investment returns on not only your contributions but also on your previous returns as well.
Investing in stocks rather than only in low-risk, low-reward investments like cash and bonds allow you for investment returns that are historically average about 10% per year about 7% after adjusting for inflation. The type of investment account you can use to save for retirement often depends on whether you are employed by a company that offers a workplace retirement plan or not. But anyone should save for retirement no matter their employment arrangement or not. Here are your options.
The type of this plan is sponsored by an employer and allows you to contribute to a retirement account directly from your paycheck. Since contributions are made before they are taxed, traditional 401(k) require you to pay income tax when you make withdrawals in retirement. With a Roth 401(k) however, you make contributions with money that has already been taxed and can withdraw it tax-free. Many companies offer to match employee contributions to a 401(k) up to the percentage of the employee’s annual earnings.
Small businesses can offer their own version, called a simple 401(k) plan, to their employees, and self-employed people can open a solo 401(k). You can start taking your 401(k) withdrawals penalty-free at age of 59 and a half or at the age of 55 under certain circumstances.
- IRA (individual retirement account):
If you don’t have access to a 401(k) and you want to save extra for retirement then you can open an IRA that stands for an individual retirement account. These also come in traditional and Roth versions and remember the income qualifications and tax treatment differ between the plan types. Like with the different types of 401(k), Roth IRAs are funded with post-tax income, and traditional IRAs are taxed upon withdrawal.
A SEP (self-employed pension) IRA is available to freelancers and the self-employed and sole proprietors or SIMPLE IRA is available to small businesses owners.
- Other investment accounts
Once you are working toward saving for retirement with a 401(k) or IRA then you can also invest in a brokerage account that is potential with a Robo-advisor or the help or support of a financial planning firm. Compared with dedicated retirement accounts, investing in a non-retirement brokerage account can let you skip certain restrictions on how much you can contribute and when you can withdraw money for retirement. Your money is still subject to tax treatment by the IRS, including capital gains by the tax.
Keep your eye on your retirement dreams. Do the best you can get to at least 15%. Of course, it may not be possible to hit that target every year. You may have more pressing financial demands-parents, children, a leaky roof, a lost job, and other needs. But try to not forget your future and make your retirement goals a priority. I hope you get all the information you need. All the best!
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