How Much Should I Save For Retirement?

Who doesn't have a retirement dream? Yours may be as simple as sleeping late or riding your bike on a sunny afternoon, or as daring as jumping out of a plane at age 90. Living your retirement dream the way you want means saving now—and saving enough so you don't have to worry about money in retirement.

Aim to save at least 15% of your income annually for retirement.

• Rule of thumb: Aim to save at least 15% of your pre-tax income each year for retirement.
• The good news: This 15% goal includes any contributions you may get from your employer.

Remember: Our rule of thumb assumes you save for retirement from age 25 to age 67. Together with other steps, that savings rate should help ensure you have enough income to maintain your current lifestyle in retirement. Your personal target saving rate, however, may vary depending on a variety of factors, including when you plan to retire, your retirement lifestyle, when you started saving, and how much you've already saved.

Why 15%?

First, we need to know how much people generally spend in retirement. After analyzing enormous amounts of national spending data, it appears most people will need somewhere between 55% and 80% of their preretirement income to maintain their lifestyle in retirement.

Not all of that money will need to come from your savings, however. Some will likely come from Social Security. For most people, they will need to generate about 45% of their retirement income (before taxes) from savings. And saving 15% each year, from age 25 to age 67, should get you there. If you are lucky enough to have a pension, your target savings rate may be lower.

While 15% may seem like a lot, if you have a 401(k) or other workplace retirement account with an employer match or profit sharing, that counts toward your annual savings rate.

Here's a hypothetical example: Consider Joanna, age 25, who earns $54,000 a year. We assume her income grows 1.5% a year (after inflation) to about $100,000 by the time she is 67 and ready to retire. To maintain her preretirement lifestyle throughout retirement, we estimate that about $45,000 each year (adjusted for inflation), or 45% of her $100,000 preretirement income, needs to come from her savings. (The remainder would come from Social Security.) Because she takes advantage of her employer's 5% dollar-for-dollar match on her 401(k) contributions, she needs to save 10% of her income each year, starting with $5,400 this year, which gets her to 15% of her current income.

Is 15% enough?

That depends, of course, on the choices you make before retirement—most importantly, when you start saving and when you retire. Any other income sources you may have, such as a pension, should also be considered.

Now that you know a savings rate to consider, here are some steps that may help you get to it.

1. Start early - The single most important thing you can do is start saving early. The earlier you start, the more time you have for your investments to grow—and recover from the market's inevitable downturns. If retirement is decades away, it may be hard to think or care about it. But when you are young is precisely the time to start saving for retirement. Even though it can be a challenge to save for the future, giving your savings those extra years to grow could make the struggle worth it—every little bit you can save helps.

2. Delay retirement - Our 15% savings rule of thumb assumes that a person retires at age 67, which is when most people will be eligible for full Social Security benefits. If you don't plan to work that long, you will likely need to save more than 15% a year. If you plan to work longer, all things being equal, your required saving rate could be lower.

Keep in mind, the road to retirement is a journey, and there are steps you can take along the way to catch up. Here are 6 tips to get started:

• Let Uncle Sam help. Make the most of tax-advantaged savings accounts like traditional 401(k)s and IRAs. Your contributions are made before tax, reducing your taxable income, meaning you get a tax break the year you contribute. Plus, that money can grow tax-free until you withdraw it in retirement, when it will be taxed as ordinary income. With Roth 401(k)s and IRAs, your contributions are after tax, but you can withdraw the money tax-free in retirement—assuming certain conditions are met.

• If you have a high deductible health plan (HDHP) eligible for a health savings account (HSA), consider contributing to an HSA to cover current and future health care expenses. HSA contributions are pre-tax and tax-deductible. Plus, when you use money saved in an HSA on qualified medical expenses now or in retirement, the withdrawals—of contributions and any investment returns—are tax-free.

• Max and match. Got room to up your 401(k) and IRA contributions before you hit the relevant annual contribution limit? Increase your automatic contributions as much as possible. At the very least, take advantage of your company match if you have one. That's effectively "free" money.

• Take the 1% challenge. Upping your saving just 1% may seem small, but after 20 or 30 years it can make a big difference in your total savings. For example, if you are in your 20s, a 1% increase in your savings rate could add 3% more to your income in retirement.

• Catch up. If you are 50 or older, be sure to make the most of catch-up contributions to your retirement savings plans. For 2019, employees over 50 can contribute an extra $6,000 over the $19,000 limit for their 401(k), 403(b), or other employer-sponsored savings plans for a total of $25,000. Also, you can contribute an extra $1,000 in addition to the $6,000 limit to an IRA for a total of $7,000 in 2019.

Is your portfolio helping or hurting your chances of retiring on time?

Market movements can shift your investment mix. Too much in stocks can increase your risk of loss—too little can undermine growth potential. Aim to have a diversified mix of investments. At least once a year, take a look at your investments and make sure you have the right amount of stocks, bonds, and cash to stay on course. Email Aspetuck Financial Management if you seek advice and guidance.

© 2018 by Aspetuck Financial Management LLC

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