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Having a happy retirement depends in part on having enough savings to maintain the lifestyle that you have become accustomed to. Making sure you save enough money during your working years, and investing those savings responsibly is incredibly important.
How much do I need to save for retirement?
Estimates vary on how much you need to save for retirement, but a standard rule of thumb is that you should build a savings nest egg equal to ten times (10x) your annual salary. If you start saving in your 20’s, then you probably need to save between 10% and 12% of your annual salary. The later you start saving, the higher a percentage of your income you need to save on an annual basis.
What are the key steps I should take in planning for retirement?
1. Use a retirement calculator.
The purpose of the retirement calculator is to identify how much retirement income you can expect with your current savings rate. For many people, this tool provides the initial ‘scare’ to save more, and to develop a retirement plan.
There are a variety of retirement calculators available, ranging from simple to complex. Some require just a few inputs, while others require substantial preparation and planning. A simple retirement calculator asks for your current savings, your current income, your expectations for inflation and income growth, and the number of years left until retirement.
2. Create a budget.
After using a retirement calculator, most people will find that they need to save more each month in order to retire comfortably. If you don’t already have a household budget, this is a good time to create a budget, and you may find opportunities to cut down on unnecessary spending.
3. Enroll in automatic savings plans and take advantage of any matching opportunities.
Often the easiest way to increase your savings rate is to have money automatically taken out of your paycheck. Does your employer offer matching funds for a 401(k)? If so, maximize the potential contribution that your employer makes.
4. Invest wisely.
This is often the most daunting task since the vast majority of people are not investment professionals. For most people, it makes sense to not invest in company stock directly or to actively manage your money, but to place your money in diversified portfolios that are actively managed by professionals or even invest in a passively managed fund that mirrors an index. Generally these passively managed funds have lower fees and are called index funds or an exchange traded funds (ETFs).
Summary
In this website, we don’t offer specific investment advice, but we hope that we can provide information that helps you think and plan ahead for retirement. Most people are no longer covered by company pension plans, and nobody should expect to live a happy retirement on social security alone. Planning for retirement has become the responsibility of every working individual, and the earlier you start, the happier you will be when you finally stop working!
Happy Retirement