From the moment we start working, we’re already thinking about retirement. Over the course of several decades, countless people put aside funds to ensure that when they are older and ready to hang their hats for the remainder of their life, they have the funds they need to live comfortably.
When you set up a retirement fund, you’ll have to decide how much you set aside each year. Many experts will recommend 15% of your annual income, but is this really enough? The answer, as always, is complicated. Let’s take a look at how it should be:
How Much Should You Be Saving For Retirement?
The first question we should ask, is if the 15% standard includes employer matching for those who work in corporate positions? The answer is yes, you should be taking into account the sum total of the funds being put aside for your retirement each year.
Using a retirement income calculator, you can see how this figure plays into your overall lifestyle. People who have higher incomes must put aside more to maintain their lifestyle into retirement, and the the opposite is true for those who have a lower income.
The 15% recommendation is more of a starting point, and not the rule for everyone. That’s something many people neglect to consider. Beyond this, you should also take into account when you started saving.
For people who start in their 20s and stick with it, 15% is a solid number, since they will spend several decades saving. If you start saving later in your career, the numbers change drastically as you have less time.
Other factors you need to consider are the following:
- The age you want to retire
- When you started saving
- How you envision your retirement lifestyle
- How long you’ll live past retirement (on average, no need to be morbid)
- The rate of return on your retirement investments
If we take all of these things into consideration, it’s nigh impossible to give a specific percentage for someone who is saving for retirement. Starting with a rule of thumb like 10 or 15 percent of your annual income is a good place to start your journey, but from there you’ll need to modify your approach to fit your needs and your desires for retirement.
As you’re setting this up, don’t let other aspects of your finances fall to the wayside. Keeping your credit score high, for example, will ensure that you’re not stuck paying down high-interest debt until you retire.
You also need to be realistic, and remember that sometimes, life happens. You may fall on hard time, and you may find yourself in need of credit repair or financial assistance. In times like this, it’s important that you know where to find help, so you can get back on your feet.
As time goes on, and life does what it will, refer back to retirement calculators, so you can alter your savings approach accordingly. This will help you alter your percentage to compensate for the curveballs life throws at you.
It’s also smart to start to put in more when you can, so that when things happen to disrupt your plans, you can afford to put in less until things go back to the way they were. Worst case scenario, there are several ways to remedy the situation, even if you can’t get your savings back on track:
- Stay on the job a few more years
- Work part-time in retirement
- Downsizing to a smaller house
- Taking out a reverse mortgage
- Moving to a part of the country with lower living costs
Final Thoughts
Just remember that you have options, and to always consider yourself and your needs. There’s never going to be an exact percentage that works for everyone, but with these tactics in place, you can ensure you’re prepared for anything.
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About the author:Barry Bensen is a financial guru who enjoys helping other prepare for all their financial needs, especially retirement.
Photo Credit: stock photo
Please change “As your setting this up, dont let other aspects of”
to “As you are setting this up, dont let other aspects of”
Good catch, Uncle Roy. Thanks.
Great post. Really enjoyed your thoughts and agree with most of your comments. Not sure about this one, “From the moment we start working, we’re already thinking about retirement.”
It was a number of years before it popped into my brain, and even more before I started acting on it.
Wish I had learned earlier how to plan. Better late than never, right?
Keep up the great work. I’ll be looking for more.
Me too, Keith. When I was a working teenager, retirement was not even a remote concern of mine. On the other hand, the rest of the piece was good advice.
Staying on the job or working part time for a few more years sound like good options, but relying on them might not work for everyone.
My grandma did work a few more years after she retired. It kept her active and was a great way to add to her retirement funds.
However, seniority often comes with consequences such as health problems, reduced mobility, loss of patience.
Maybe starting a side hustle would be a better alternative (especially nowadays when so many are already making money working from home). Or, like you already mentioned, downsizing or moving somewhere cheaper.
Good comments, Adriana. I agree; I think seniors who never fully retire — by staying active and perhaps keeping a side hustle, or working reduced hours — are much better off, if not from a financial perspective, then at least by a health and well-being perspective.
A simpler question may be ‘when do you want to be financially independent’? That’s when your investment portfolio value is 25x your annual expenses. For a short runway with low salary and investment growth rates your after-tax savings rate would have to be 25/(25+WorkYears).
This formula is pessimistic if you work to full retirement age because by then pensions and social security will cover much of your expenses, plus the growth on your investments may give you a major tailwind over so many decades if you invest in stocks. So how much you should kick in depends on how optimistic you want to be– this is how pensions can be “fully funded” despite low employer contributions. So if you feel lucky…
But if you want to sprint to the finish line and be done with paychecks before hitting middle-age, this is what it takes. I did it in 11 years and yes my after-tax savings rate was ~70%.
I started at 15% in my 401k but dropped as life got more expensive (kids). I wished I had stuck with it as I would be much closer to FI if I had. But at the time, just saving 8-10% seemed better than most of my peers were doing.
I would guess that 8% to 10% of your income is better than probably 99% of the working population, Cate.