When Should I Start Saving for Retirement?
The answer is simple: as soon as you can. Ideally, you’d start saving in your 20s, when you first leave school and begin earning paychecks. That’s because the sooner you begin saving, the more time your money has to grow. Each year’s gains can generate their own gains the next year – a powerful wealth-building force known as compounding.
Where Should I Save My Retirement Money?
Tax-favored retirement accounts such as individual retirement accounts (IRAs) and 401(k)s are the most common place to save for your retirement. Do your research, different types of plans have different features, but most of them allow you to defer taxes on the money you save and the returns you earn within the account. A diverse plan and portfolio including different types of tax strategies is recommended.
How should I Invest the Money?
To build a nest egg large enough to see you through retirement, which may last 30 years or more, you’ll need the growth that stocks provide.
The stock market returned 10% a year on average over the past 90 years, versus just over 5% for bonds. Given stocks’ superior returns over the long haul, most advisers recommend that investors whose retirement is more than 20 years away hold at least 3/4 of their portfolios in stocks and stock funds.
Of course, a stock-heavy portfolio can be volatile during corrections, crashes and bear markets. For example, during the 2007-09 bear market, U.S. stocks lost 50% of their value – and it took the market more than three years to recoup those losses. The stock market also suffered a 44% decline during the bear market at the start of this decade.
Once again, a strategy that includes down-side market protection as part of the overall approach is important.
How Should My Strategy Change as I Get Older?
As you approach retirement age, most experts agree you should gradually shift more into bonds to protect the money you’ve accumulated. But retirement can last a few decades, so it generally pays to maintain a healthy dose of stocks well into retirement.
If you want to put your asset allocation on autopilot you simply choose a fund that’s labeled with the year you intend to retire, and it will automatically adjust what it invests in (usually a mix of stocks, bonds and cash) to maximize your return and minimize your risk as you get older.
How Much Money Will I Need in Retirement?
One rule of thumb is that you’ll need 70% of your pre-retirement yearly salary to live comfortably. That might be enough if you’ve paid off your mortgage and are in excellent health when you kiss the work force good bye. But if you plan to build your dream house, travel around the globe, or even go back to school, you may need 100%+ of your annual income.
Make realistic estimates about what kind of expenses you will have in retirement. Be honest about how you want to live in retirement and how much it will cost. These estimates are important when it comes time to figure out how much you need to save in order to comfortably afford your retirement.
Will Pensions and Social Security be Enough?
Unfortunately, probably not. When you run the numbers, you should definitely factor in other sources of income in retirement, including Social Security and a traditional pension, if you’re lucky enough to have one. But your personal investments and savings will have to generate enough income to cover the shortfall.
You can check your estimated Social Security benefits by using the government’s Social Security Online calculators. Current or former employers can provide estimates of any pension benefits you might receive when you retire.
How Much Should I Save?
As much as you can. Many financial planners recommend that you save 10% to 15% of your income for retirement, starting in your 20s.
But that’s just a guideline. This is your retirement, so it pays to get a little more specific by doing your homework. It’s a good idea to establish a savings target – one that tells you roughly how much you should set aside over time to meet your retirement goals.
As a general rule, you’ll need at least $15 to $20 in savings to cover each dollar of the annual shortfall between your income and your expenses. So for example if your projected retirement expenses exceed Social Security and pensions by $20,000 a year, you might need a nest egg of $300,000 to $400,000 to bridge the gap.
What if I Can’t Save Enough?
Try to divert as much of your earnings into savings as you can. If you don’t have a budget, create one. If you do have a budget, revise it to reflect your newly urgent commitment to saving, as well as any changes in your spending since your last check up. Try and get rid of wasteful spending habits as that is money that can be saved and put to work.
If you’re still young and you can’t save enough right now, don’t be discouraged. Your income will probably grow as you progress in your career, allowing you to save more. You might also have other opportunities to boost your savings rate; for example, a bonus or inheritance can make a big difference in your long-term prospects if you invest some of the money in retirement accounts.
What if I’m Running Out of Time?
If you find yourself running short on time – say, you’re in your 40s or even your 50s, and you haven’t gotten started yet there are still a few things you can do. The key is to do them now! No matter what the situation looks like currently, just start right now, today and do what you can from this point going forward.
One answer is to learn how to produce cash flow during retirement. The 55- to 64-year-old age group accounted for more than a quarter of new business startups in 2017, according to the Kauffman Foundation.
When Can I Retire?
Trying to figure out whether you can retire is like putting together pieces of a financial puzzle. First, you need to estimate how much you’ll spend in retirement. Then you must consider the income you’ll collect in retirement from all sources and how much you can draw monthly from those sources.
The idea is to assemble the various pieces, and then see whether the picture of retirement life that emerges is acceptable to you.
To help bring the retirement picture into better focus, try plugging all your pertinent financial information into an online calculator. The calculator can crunch all the numbers and assess your odds of being able to retire at a given time in the future.