We all know that it is important to save for retirement but determining how much we will need can be difficult. This number is more than we think but like a lot of financial questions, there is no one-size-fits-all answer. However, there are certain benchmarks and guidelines we can use to measure progress and figure out if we are on the right track.
Saving by the Decades
There are some formulas that will show us if we are on the right track when it comes to saving for retirement or if we need to accelerate our savings (and decelerate our spending). Here are some actions you can take during each decade leading up to retirement to help your Golden Years be all you want them to be:
In Your Twenties
The earlier you start investing, the better. Time matters more than dollar amount when it comes to saving for retirement because of the power of compound interest. Here is a hypothetical example:
Jack and Susan both invested $15,000 that averaged 5.5% growth a year. The only difference is Susan invested her lump sum at the age of 25 while Jack waited until he was 35. Fast forward to when they both turn 50. Susan’s $15,000 would be worth $57,200.89. Jack’s $15,000 would only be worth $33,487.15! Susan and Jack invested the same amount of money but, by investing ten years earlier, Susan would have $23,713.74 more than Jack.
There is no substitute for time when it comes to saving for retirement!
In Your Thirties
Life can start to get hectic in your 30s. You might get married, buy a house and have a kid or two. All of these can tempt you to put saving for retirement on the back burner. This can especially be true when you don’t have a number in your head of where you should be. A good benchmark to aim for in your 30s is to have one year’s gross salary (your salary before taxes and deductions are taken out) saved by age 35. You still have many years to save, but if you are far from a year’s salary, now is the time to buckle down.
In Your Forties
Time feels like it’s accelerating in your forties and what once seemed very distant – retirement – now seems to be coming up fast. By age 45, aim to have three times your gross salary in retirement savings. Don’t worry if you are behind. You are likely to be making the most money you will ever make during this period of your life. While you can’t make up the time, you can catch up by throwing more money towards retirement savings.
In Your Fifties
There may be some competition for your retirement money during this stage of life. It’s understandable that you want to help your children pay for college, but you cannot do it at the expense of your retirement. Your children have many more years of work ahead of them to pay off student loans; the window for saving for retirement is beginning to close. You also want to start thinking about what kind of lifestyle changes you will make during retirement. Will you continue to work in some capacity? This could include part-time work or even consulting. Will you downsize your home or move to an area with a lower cost of living when you no are longer tied to a location because of your career? All these things will factor into how much you need to retire.
In Your Sixties
Retirement is remarkably close now and perhaps you are starting to dream about having the freedom to sit on a beach or ski down a mountain whenever you want. When you reach your sixties, it is important to pinpoint your numbers to make sure your hopes and dreams become reality. You may have to adjust your original plan and work a little longer. Make sure you do a careful audit before you call it quits.
Know Your Numbers
Too many people have no idea how much money they will need to retire or if they are on the right track. You can use the benchmarks above to evaluate how well you are doing. If your numbers aren’t where they should be, don’t panic. If the best time to start saving for retirement was when you were 20, the next best time is today. It is almost never too late to start, you just may need to ramp up your contributions. While these benchmarks are good rules of thumb, each situation is unique. If you are curious as to what your specific savings targets should be and would like to set up a savings plan, please meet with a financial professional or your Money Mentor to come up with your personal retirement roadmap.
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