We all know that we need to save for retirement.
But, not everyone has a clear understanding of how much or how to save for retirement.
And that’s okay. How are you supposed to know exactly how much you’ll need to live out your last 20+ years?
The truth is that unexpected expenses are bound to come up. You can’t always plan for these, but you can make sure you have a retirement fund that can handle anything that might come your way.
We’re going to give you some guidelines on figuring out how much you need to save, and then we’ll show you some ways on how to save for retirement.
We’re going to cover:
- How Much Should You Save For Retirement?
- When Should You Start Saving For Retirement?
- How To Save For Retirement
- Stay Focused On Your Retirement Goal
How Much Should You Save For Retirement?
Experts typically suggest that saving 15% of your gross income is sufficient for retirement savings.
However, the reality is that it all depends on what you age you wish to retire at, and your plans once you do.
Do you dream of traveling the world and spending months away at a time? Or do you plan on downsizing your home and enjoying quality time with family?
The latter is going to require much less of a nest egg. But, only you know what your plans are once you retire. Once you’ve figured them out, the next step is developing a savings plan that will support them.
That means 9 out of 10 Americans are going to struggle financially once in retirement.
Maybe you’re thinking, “So what? Social Security will make up the difference.”
Well, chances are it won’t. You need to think of Social Security as an extra supplement to your retirement savings, not the other way around.
Planning for retirement will take some analyzing and critical thinking. You need to determine how much money you’ll need based on your retirement expectations.
When Should You Start Saving For Retirement?
Experts suggest that you start to save for retirement in your 20’s.
By starting early, your money will have more time to grow. That means you could add thousands of dollars to your bottom line without having to think about it.
Just how much of a difference does it make if you begin saving early? Let’s take a look at two different scenarios.
Scenario One: Let’s say that you decide to start saving $500 a month to put towards retirement when you’re 40 years old. Your money will grow at 9.5%, the same rate as the historical average annual return of the S&P 500. When you retire 27 years later, you’ll have put $162,000 into your retirement account. But, you should have $800,000.
Scenario Two: Let’s say that you start saving earlier, at age 25. But, you can only contribute $250 a month. Your money will grow at 9.5%, the same rate as the historical average annual return of the S&P 500. When you retire 42 years later, you’ll have put $126,000 into your retirement account. But, you should have $1,700,000.
Which scenario would you prefer? I don’t know about you, but personally I rather have the extra $1 million in my account.
So you’ve probably got one foot out the door already to go open that retirement account so you can enjoy the benefits of compounding interest. But, not so fast!
If you’re currently in debt, there’s 2 things you should do before you set up that retirement account.
- Build an Emergency Fund
- Save up anywhere from $1,000 to $1,500 in an emergency fund that’s separate from your retirement savings. Unexpected events are bound to happen, and you want to be ready for them without sacrificing your future. Once you’ve successfully done this, continue to add to the account until you have at least 6 months of living expenses saved.
- Pay Down Debts
- Yes, your money is going to grow in a retirement account. But, the interest is also accruing on your credit cards anytime you carry a balance into the next month. Take the time to pay down the debts you currently have, before you start contributing to your retirement fund. Utilize either the Debt Snowball or Debt Avalanche Method to help you get those cards to $0.
By preparing for the unexpected and building a strong foundation, you won’t be tempted to tap into your retirement savings in case of an emergency.
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How To Save For Retirement
There’s a lot of things that may keep your from saving and achieving your retirement goals.
The reality is that saving for retirement is hard, especially when your day to day expenses get in your way.
There are some common barriers to saving for retirement that affect us all. But, there’s always a solution to overcome even the toughest of challenges. So, let’s take a look at some of these daily obstacles that can derail our retirement savings plan, and how to work around them.
Barrier #1: High Cost of Living
The median household income has grown almost 20% over the past decade.
Sounds like everyone has more money to save, right? Not exactly. As the median household income has increased, so has the cost of living. In fact, it’s increased 18%, making that jump in the median household income pretty minimal.
So the question remains:
Even though you might not have more money to work with, there are 2 ways to tackle this barrier and find money to put away towards retirement.
- Create A Budget
- You can’t even begin to think about saving for retirement until you create a budget. Doing this will give you total control over your finances, and you’ll know exactly where your money is going. So, you’ll also know exactly how much you have left to put towards your savings. Creating a budget will help keep you focused on working towards your financial stability.
- Save Your Raise
- Yes, it can be extremely tempting to go out and pamper yourself a bit when you get a raise. You worked hard, and you want to reward yourself. There’s nothing wrong with that, but make sure retirement is your number one priority. When you do get that well deserved raise, try to save 15% of it to reinvest. Over time, you’ll see the impact it has on your retirement fund and you’ll be thanking yourself.
It’s never too late to make changes that will ease your worries and benefit you in the long run.
Barrier #2: Medical Expenses
Medical expenses are making it more and more difficult to save money. These costs have gone through the roof, and there’s nothing we can do to stop it.
Are you someone who is struggling with medical expenses? Are your medical bills eating up any money you could be putting towards retirement?
If so, there is an option for you.
Open a Health Savings Account, also known as HSA. An HSA is a tax advantaged medical savings account for people with high deductible health insurance plans.
Most health insurance plans cover 100% of your medical expenses, only after your deductible is met. By opening a HSA, you can save while you invest money to pay for deductibles and other medical expenses tax free.
Barrier #3: Credit Card Debt
Credit card debt is one of the top reasons why people fall behind when it comes to retirement savings.
You can’t exactly plan for your future if you’re still focused on paying for past purchases.
There’s 2 suggested methods for wiping out credit card debt:
- Debt Snowball Method
- Debt Avalanche Method
Debt Snowball Method
The Debt Snowball Method has you order your debts from smallest amount owed, up to the highest.
The debt with the smallest amount owed is the one you’re going to tackle first. Devote as much as you can to this account, while making sure you still meet the monthly minimums on your other cards.
Once the first account is paid in full, shift your focus to the second smallest balance on your list. Don’t forget to maintain your monthly minimum payments on all other accounts.
Continue to do this until you’ve paid all of your accounts in full.
Debt Avalanche Method
The Debt Avalanche Method has you list your debts from those with the highest interest rates, to the lowest interest rates.
The account with the highest interest rate is the one you’re going to tackle first, no matter the size of the balance. Be sure to keep up with the monthly minimums on your other accounts.
Once the card with the highest interest rate is paid off, move onto the next highest. Continue to do this until your cards are completely paid off.
By targeting the cards with the highest interest rates, you’re helping yourself save more money in the long run.
As you see yourself paying off cards and getting out of debt, you’ll feel a great satisfaction. Plus, you’ll be freeing up money that can go towards your retirement savings.
Barrier #4: Excess Expenses
You need to look everywhere for potential savings that can go towards your retirement. And you’re probably not even realizing how much money you’re spending on certain things.
Take your kid’s extracurricular activities, for example.
Did you know that these cost an average of $740 to $4,000 a year?
That’s quite a hit. Not to mention the miles you’re putting on your car or the gas tank you’re constantly refilling. How much could you be saving if you were to make some adjustments here?
If your son or daughter participates in more than one activity, prioritize which is most beneficial for them.
Let’s say that your son is taking both guitar and drum lessons. These both cost $160 a month each. So, you’re paying $320 a month or $3,840 a year. If you cut back and only continue lessons for his instrument of choice, you could save $1,920 a year.
$1,920 over the course of 10-15 years could mean an extra $20,000+ going towards your retirement plan. Just think about how much that $20,000 will really be once the interest starts compounding.
Do what you have to in order to make adjustments to save money here and there. By just reeling in a few excess expenses, you could save the recommended 15% of your income.
Stay Focused On Your Retirement Goal
While experts suggest you begin saving for retirement in your early 20’s, it’s never too late to start and the sooner you do, the better.
It’s important to make retirement a priority, and work around everyday obstacles to save wherever you can.
Have you started saving for retirement yet? Let us know in the comments!
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