How much money to save for retirement
Saving for retirement can be a daunting task. You might be unsure of where or how to begin saving. You shouldn’t need to be working just to pay your bills when you’re 80, but to enjoy your retirement, you’ll need to have some money saved up.
Today we’ll share how much you should aim to save for retirement and a few steps you can take to reach your goal. We’ll also answer some common questions about enrolling in a 401k and choosing where to save your money.
How much should I save for retirement?
There's no set goal for retirement savings because many different factors will affect your end goal. So, where should you start?
First, you want to consider your current lifestyle, wants, and needs. A common goal is to have 80% of your current income saved for each year of retirement. You will likely spend a bit less money during retirement, and your savings and investments will continue growing during retirement.
That means if you’re making $100,000 a year when you retire, saving $1,000,000 would potentially be enough for 12 1/2 years of retirement. Saving up a million dollars might sound impossible, so it's best to start with a smaller goal instead. Most financial experts suggest aiming to save 10-15% of your income every time you get paid.
Unfortunately, an estimated 40 million households in America currently have no retirement savings. The best way to avoid that situation is to start early and be consistent. Even if there's times when you can only save 1% of you're income, it's better than nothing. It’s also essential to teach your kids how to save and invest their money.
6 steps to help you start saving for retirement
There are plenty of resources, both free and paid, designed to help you save for retirement. You should spend time learning how to save, but then you need to take action steps. The sooner you begin saving, the more successful you will be.
If you wait to start saving, you’re putting yourself at a significant disadvantage because your investments will grow exponentially over time.
If you start saving when you’re 20, the average dollar you contribute will grow to $6. If you wait until you’re 40, the same dollar you contribute will grow to $3. In other words—start saving as soon as possible.
Here are six steps you can take to start saving today:
1. Create a budget
Only about 1 out of 3 people have and use a budget. Sticking to a budget can both help you save money and reduce unnecessary spending. You'll be surprised to see how quickly things like eating at restaurants, monthly subscriptions, and daily coffee adds up.
2. Set your short term goals
Remember, your goal is to start saving for retirement today! If retirement is decades down the road, it can be difficult to set realistic and achievable goals and easy to procrastinate. Start with a short term goal. What do you want to save in the next six months?
3. Set your long term goals
Once you're making progress towards your short-term goals, you can focus on more general long-term goals. Where do you want to live when you retire? What do you want your lifestyle to be like? Loved helps you set smart investing goals so you can create a portfolio that matches the goals you want to achieve.
4. Open an account
This is the first big step in the right direction. You don’t want to keep your retirement savings under your mattress or in a traditional savings account. If your employer offers a 401k, find out if they’ll match your contributions. And if you’re self-employed or don’t want to use a 401k, you can use your primary bank or an online financial tool like Loved to start an investment account.
5. Automate your savings
The best way to save and invest is by taking small steps every day. Saving $10 a week is easier than trying to save $500 once a year. It’s like taking one step at a time compared to trying to jump up an entire flight of stairs. You can set up a recurring weekly or monthly amount that automatically goes into your retirement account.
6. Cut out unnecessary spending
We all spend money on stuff we don’t really need. Cutting down your spending won’t be easy, but it will help you prepare for retirement. Sticking to your budget and setting up automatic savings will help with this step.
Should I pay off debt or save for retirement?
This is a common question that comes up: when you have some extra cash, what’s the best way to use it? Paying off debt? Or putting it in savings?
There are two sides to this conversation. One side believes that every debt needs to be paid off as quickly as possible. The other side says you need to pay yourself first and save up. So there’s no answer that’s 100% correct.
We suggest that you take advantage of both saving and paying down debts. For example, if your employer matches your 401k contributions, you should take advantage of that because you’re doubling your money right away. You should also save up an emergency fund to avoid going further into debt if a big bill comes up.
The average investment return is around 7%. That makes it more beneficial to pay off a credit card with a 15% interest rate. And in the same situation, it would also be more beneficial to invest your extra money rather than pay off your mortgage with a 3% interest rate.
Do I really need a 401(k)?
There are benefits to a 401k, but do you really need one?
By definition, a 401k is an employer-sponsored retirement savings plan. The main advantage of a 401k is an employer match. If you decide to put 2% of each paycheck into your 401k, your employer may match your contribution up to a certain percentage (usually 1-2%).
If that’s the case, you should take advantage of this because you’re instantly doubling your money. But, if your employer matches a 1% contribution, should you put in more than that?
Today, there are plenty of options outside of a 401k that can help you save for retirement. A 401k also comes with disadvantages like limited investing options, higher fees, and strict withdrawal limits.
We suggest taking advantage of an employer match but would avoid putting all of your retirement savings into a 401k account.
It’s better to have a diversified portfolio, and investment tools like Loved can help you avoid paying higher fees and avoid withdrawal limitations in case you need the money sooner.
You can click here to start saving for you and your family's future.