The average retirement age in the United States is between 62 and 65. However, social security benefits don’t kick in until after the age of 66, so many people are putting retirement off until age 67.
You’re in your prime, so you’re probably not even contemplating retirement yet. But it’s definitely something that should be front of mind. Instead, many people fill their lifetime bucket lists with trips abroad, vacation homes, and new cars. This isn’t a bad thing. What’s not so good is that amidst filling these bucket lists, some never stop to think they should also be investing in their future.
In fact, retiring with enough money is the financial goal that should be at the top of your bucket list. After all, how will you get that sports car to show off on road trips if you haven’t set yourself up properly financially?
Financial freedom in your later years is a must. That looks different for each of us, but you want to have enough money to live comfortably in the future without feeling the budget restrictions now.
While every road to retirement looks different, they’re all headed in the same direction and paved with the same thing: savings. Wondering how much you need to retire according to your lifestyle and “win” at retirement? If that one question has you frozen in your tracks, here’s what you need to know.
How much money do you need in retirement?
Living a sustainable life in retirement means having enough money for your everyday needs and incidentals. To figure out how much you need to retire in comfort, you first need to add up your typical monthly expenses and factor in such things as inflation, how old you are now, and how many years before you’ll enter retirement. Once you have a rough estimate, then you can begin working on a savings and investment strategy.
It’s typically recommended that retirees have around $1-2M saved when entering retirement. Of course, this is a rather large range and it depends entirely on your personal lifestyle preferences and finances.
Based on the assumptions that:
- You’re saving 15% of your income towards retirement annually.
- Your employer matches your savings.
- You’re investing at least 50% of your income.
- You began saving for retirement at age 25.
- You plan to retire at 67.
- You plan to maintain your current lifestyle in retirement.
Your retirement savings should total:
- Your annual income by age 30.
- Three times your annual income by age 40.
- Six times your annual income by age 50.
- Eight times your annual income by age 60.
- 10 times your annual income by age 67 (retirement).
You can scale these up or down depending on several factors, such as:
- What age you begin saving for retirement.
- What age you actually plan to retire.
- How much extra you can deposit into your retirement over the years.
Plus, the interest you earn on your savings and other investments compounds annually. In other words, you earn interest on the interest you earn. Some examples of investments that accrue compound interest include your savings account and real estate investments.
When should you start saving for retirement?
If you’re in your 20s or 30s, the idea that you’ll someday be in your 60s probably doesn’t even compute. It’s too far into the future, right? Well, it’s this mindset that causes many people to put off saving for retirement for another day. The truth is, the earlier you begin saving or investing for your retirement, the easier you’ll be able to reach that $1-2M number.
What if you can’t save very much because of current financial obligations? Even saving just a fraction of your current take-home pay gets you that much closer to your retirement dreams. In fact, the earlier you start, the more flexible your options become. You’ll be able to increase or decrease your investment strategy as you age.
A greater time investment means more growth opportunities and greater returns. Beginning your retirement savings in your 20s or 30s means you have plenty of time to save—which also means your portfolio has time to adjust to the inevitable market swings, whether you’re investing in stocks, bonds, ETFs, or alternative investments.
Recommendations for retirement savings amounts range from 10-15% of income before taxes. These funds should then be placed into an account that isn’t taxed, such as an IRA or a 401(k), starting around your mid-20s up to the day you retire. For some, this simply isn’t possible, but that’s okay. Even if you can only manage 3% of your pre-taxed income, that’s a start. As you progress in your career and receive annual raises or other benefits, plan to add an additional percentage point to your retirement savings contributions until you’ve reached 10% or 15%.
Some employers offer matching for retirement savings accounts, and this can help you reach that 15% mark quickly. For instance, say you’re already contributing 6% of your pretax income and your employer offers a 50% match, or $0.50 for every dollar you contribute. Then you’re actually contributing 9%. Not too shabby.
You’ve probably heard that there’s no such thing as too early to begin saving for your retirement. Well, there’s no such thing as too late, either. Whether you’ve dealt with student loan payments, lack of employment, or credit card debt, retirement savings are always an option. There’s still time to get your finances on track for a successful and restful retirement.
Some of the best things you can do include taking part in your employer’s matching plan and automating your savings. Savings automation can be as simple as having a portion of your earnings moved directly into your savings every time you get paid or having a specific percentage of your earnings managed by an investment platform. Auto-pilot contributions mean you’re continually investing in yourself and you don’t have to worry that you’ll forget about funding your retirement account. If you don’t have an employer retirement option, don’t worry—you can opt for an IRA (Individual Retirement Account), if you choose.
Know your options
There are multiple ways you can save your money for retirement, such as pension plans, stocks, precious metals, and real estate. As you build your retirement portfolio, take into account such items as how old you currently are and how much risk you’re willing to accept. Nothing ventured, nothing gained, right? But it’s typically advised to try riskier portfolio items when you’re younger and you have more time to recuperate financially in the event of a market downturn. Once you hit your 40s and 50s, it’s safer to switch to less risky investments.
Do you have an investment partner on your side?
You probably have asked a friend or family member for advice on your finances or a particular investment. When it comes to planning your retirement, though, it’s best to have a professional investment partner in your corner. Whether you’re curious about real estate investing or you have a tax-related question, you need correct information from experienced professionals.
You’ve devoted your entire life to hard work. It’s only natural that you want to spend your retired years enjoying your favorite activities and the relaxation that comes with never having to work again. In order to spend your retirement in dignity and independence, now’s the time to start investing in the future.
It doesn’t matter whether you’re in your 20s or your 40s; committing to a solid retirement plan now defines what you’ll be able to do when you enter retirement. Review the above tips and get started on your path to financial independence in retirement.