For those in their 20s, retirement seems like a far-fetched event. This is why many youngsters think that they shouldn’t fuss too much about saving up for their retirement. There are many years left, they say. I can save as much as I can, then hope for the better. This is where things get a little tricky. So how much should I save a month for retirement? In this post, we will guide you through the idea of retirement, savings, and how much you should have by now.
Do millennials save for retirement?
Millennials, or those in the 23 to 38 age bracket, are surprisingly more involved in retirement savings. According to a joint survey of Morning Consult and Business Insider, 45% of millennial respondents have a retirement account. Of these numbers, about 33% are actively contributing to their account.
So should you, at a young age, think and save for retirement? According to experts, it’s better to save a decent amount per month while you’re on your 20s than to pay six times more when you’re older.
When it comes to retirement funds, it’s a matter of starting early than paying more. Not convinced? Here’s a big difference that starting early can make on your retirement plan according to CNN Money:
Let’s say you start saving at age 25 with $3,000 a year for 10 years. By the time you reach the age of 65, your $30,000 saving would already be $338,000, assuming that the annual returns would be 7%.
Now, let’s compare it on saving at the age of 35, where you save $3,000 a year for 30 years. This is equivalent to $90,000 when you turn 65. Factoring in the same 7% annual returns, your money would only grow to $303,000.
As you see, saving early with the same amount and in a shorter period makes a significant difference.
Millennials are aware and planning their retirement early, which gave birth to the F.I.R.E. community. F.I.R.E. stands for Financial Independence & Retire Early.
In this video, Yahoo Finance reporter Jeanine Ahn tells us more about this rising financial trend:
When should I think about retirement?
As soon as possible. Contrary to what other people think, planning one’s retirement shouldn’t be done when you’re already too old to save for it.
Nevertheless, we recognize the fact that starting young may not be possible for many. Student debt is one of the leading reasons why many young people put off saving for retirement.
The magic of compound interest is only effective if you start saving early. Also, we recommend making saving a habit. The good ol’ line ‘saving before spending’ still rings true.
How much should I save a month for retirement
Knowing how much you need to save depends on how much you actually need. According to the Center for Retirement Research at the Boston College, you need about 80% of your current income to fund your retirement.
So if you’re earning $100,000 a year now, you’ll need about $75,000 per year once you decided to retire. This is called replacement income, which should be multiplied to your life expectancy starting from your retirement year.
Let’s say you expect to leave for another 20 years upon retirement. With the same numbers as above, you’d need at least $1.5 million to live a comfortable retirement life. This is in conjunction with the latest survey that Americans need at least $1.7 million for retirement.
This is just a mere ballpark. You also have to factor in the increased cost of health care, among other needs that you’ll have as you age.
If you want to have an idea about how much you need to save for retirement, MSN Money offers a straightforward calculator. Just enter your variables, and you’ll see an estimate.
The 4% savings rule
Another way to calculate a rough estimate of your retirement savings is by dividing your needed retirement annual income by 4%. With this formula, your nest egg by retirement is around $1.875 million if your desired annual income is $75,000.
Remember that this amount is based on the assumption that you’ll live the same lifestyle you have now upon retirement. Also, it assumes that you’re going to withdraw 4% of your retirement savings in your first year. It’s also expected that you’ll withdraw the same amount on the succeeding years, with the amount adjusted depending on the inflation rate.
In this video, Ben Felix tells us more about the 4% rule in retirement investment:
Multiply by 25 rule
This rule is simple and straightforward: divide your desired annual retirement income by 25. So if you want $75,000 a year on your retirement, you need $1.875 million on your bank account. The result is the same as the 4% rule.
This rule is banked on the idea that you’ll get to realize 4% of returns from your investments each year.
If you don’t like doing the math, here’s the 15/25/50 recommendation from the experts if you want to start saving for your retirement:
Save at least 15% of your salary starting at age 25, with at least 50% of the savings invested in stocks.
There are also saving benchmarks to at least let you know if you have enough money at a specific age. The following are some of the savings benchmarks to keep you financially stable up to retirement:
*By age 40 – 2x your annual income
-By age 50 – 4x your annual income
*By age 60 – 6x your annual income
-By age 67 – 8x your annual income
Factors that affect how much you need to save
Social security and pensions are two additional funds that will affect how much you need to save for retirement. As mandated by law, a portion of your income is debited automatically to fund your Social Security fund.
However, you should remember that Social Security payout varies widely. The average monthly payout for retired workers was just $1,176 back in 2010. This just proves that you can’t solely rely on your Social Security.
Another potential source of income on your retirement is a pension fund. This is often set up by your employer during your working years. You and your employer will shoulder the premiums for this fund as long as you’re employed.
Still, pension payouts aren’t always enough to support your retirement needs. This is why you should really consider opening a retirement fund.
The difference between saving and investing
The biggest difference when preparing for retirement is investing your money vs. saving it.
Savings incur minimal returns since it only depends on the interest rates of the bank. In short, your money is just sitting wherever you saved it. Still, it offers the least risk.
On the other hand, investments have better returns, but you have to manage the risks.
For the right balance, we recommend investing half of your savings and keeping the other half intact for emergencies. That way, a portion of your income is growing as you sleep.
How to start a retirement fund
You can always start small. A small amount of $500 is already a great start for your retirement fund. You can find a broker with no minimum requirements to open an account. Although you’re starting small, the key here is being consistent. Contribute to your fund regularly, and the amount would surely accumulate over time.
If your employer has a 410(k) program, you can ask for your premiums to be deducted automatically for each month.
If you’re planning to open a retirement fund with a brokerage firm, always be meticulous with your options. Check their fees and how much ETFs they offer. Don’t consider trading if you have limited savings.
Most importantly, you have to be very realistic with returns and risks. Small investments will only yield small returns. And as much as larger investments will give better benefits, you always have to deal with an equally high level of risk.
You wouldn’t want to destroy your savings right away just to fund your investments. Like how the trite investment maxim goes, “invest only what you can afford losing”.
How to increase your retirement savings
Aside from knowing how much you need to save, there are other ways to increase your retirement fund. We recommend the following:
1. Start early
We can’t stress this enough: starting early is the best way to increase your retirement savings. If you’re in your 20s, compound interest is at its prime. Don’t leave it at the table.
Even with a small amount, you can manage to match the retirement savings of those who contributed a large amount later in life. Just be wise with the retirement plan you’re paying for to maximize its returns.
If you’re a total newbie, you should consult with a financial advisor about saving and retirement. They can discuss your options and the benefits of each one.
2. Consider opening an IRA
If you’re really serious about saving for your retirement, we recommend that you open an IRA or Individual Retirement Account. You can compare and contrast different types of retirement accounts but most people end up deciding between a traditional IRA and a Roth IRA.
The traditional IRA might be suitable for you if you or your spouse has a retirement plan at work. Contributions to the traditional IRA can be tax-deductible too.
On the other hand, the Roth IRA is suitable for those who are within the phased out income limits. Your after-tax contributions will fund this account. By the time you turn 59 and ½, there’s a high chance that your earnings may both be federal and state tax-free.
3. Delay your Social Security payments
If you’re still working past the age of 62, you may want to delay your Social Security payments until you decided to retire. For each year that you delay your payments, your monthly benefit increases. Even one year of delaying the payments makes a big difference in the amount you’ll get.
Starting early and retiring late is a guaranteed way to rake more money for your retirement.
4. Grab your employer’s match
If your employer happens to offer a 401(k) match, don’t hesitate to grab it. Such a match could be 50% of your contributions or even up to 5% of your salary. This is literally free money that you’ll get for your retirement fund.
If you’re contributing $2,500 a year on your plan, your employer will add another $1,250 on top of that. This is aside from the potential tax benefits that you’ll get. If you can, we recommend contributing the maximum amount each month to your retirement plan.
5. Choose the right state to retire
Another choice that you have in maximizing the value of your retirement fund is by choosing the right state where you’d retire. Florida, Texas, South Dakota, and Nevada are just some of the states with no state income taxes.
Always evaluate the tax rules on the state where you plan to retire. This way, you can save more money that you can use on other things during your retirement.
6. Automate your savings
One of the hardest things about saving is the actual habit of setting money aside. So instead of thinking twice about saving money or buying a new pair of shoes, you might as well automate it. For each paycheck, a specific amount will be transferred to your retirement fund. That way, what’s left on your account is the amount you can spend.
As much as you can automate your savings, you should always check if it really goes through. You wouldn’t want to lose money due to a glitch you failed to spot early on.
7. Have a rainy-day fund
Aside from saving for your retirement, you should also have a rainy-day fund. This is the money you can spend during emergencies. Someone may get hospitalized, you may need to buy new appliances, or other expenses might surface. With the extra fund in place, you wouldn’t have to dip into your retirement savings.
How much should I save a month for retirement? It all depends on your needs, your starting age, and other factors. What matters is you choose a retirement plan that will give you the best benefits. When in doubt, you can always consult with a financial adviser near you. Being informed and meticulous pays off if you’re saving money and planning your retirement.
Remember, it’s never too early to plan for your future.