While every American dreams of retirement, the big question most people face is how much money they will need to save up in order to retire comfortably. Many financial planners advise at least a million dollars worth of assets which, thanks to the recent stock market boom, is not outside the reach of many Americans anymore. But others recommend even more money, $3 million, $5 million, even $10 million, in order to ride out any possible twists and turns in the markets. So how much do you really need?
Savings Is Personal
Ultimately the amount that each person, couple, or family will need to have saved up is a personal decision, based on your current lifestyle, expected lifestyle, and how long it will be until you retire. If you’re just starting out in your career, the amount of money that you’ll need to save can seem daunting. But because of economic growth and compounding interest, you’ll be able to grow your nest egg even if the amount you can save each year isn’t all that much.
If you’re further along in your career or closing in on retirement, you may have some catching up to do. Take advantage of the opportunity to make catch-up contributions if you’re nowhere close to your savings goals.
Calculate How Much You’ll Need
How much money you’ll need to save is based on what your current expenses are and what your projected expenses will be. You’ll need to factor in inflation as well, because your cost of living will increase over time. A quick rule of thumb is that the average household spends about $40,000 per year in retirement. When you make your savings assumptions, assume a lower rate of growth than you can expect, and a higher rate of inflation.
While inflation may be around 2% now, let’s assume that it will run 3.5% annually over the long term. If you’ll be retiring 30 years from now, that means you’ll be spending $112,000 per year in retirement. If you’ll be retiring 20 years from now, expect to spend around $80,000 per year, and if you’re retiring in 10 years, plan on $56,000 per year, at least starting out. If we assume that you’ll retire at 65 and live for another 20 years, that means you can expect to spend $3.18 million, $2.25 million, and $1.6 million in retirement respectively.
Then calculate how much your current savings will grow at an average rate of 6%. Again, this is a conservative assumption. Pension funds have gotten themselves into trouble by assuming long-term growth rates of 8-10%, so always err on the cautious side.
Let’s assume that you’ve able to save $1,000 a month in a 401(k) or IRA, and you saved that consistently over your career, starting at age 25. When you retire in 10 years you’ll end up with over $1.6 million in assets, enough to last you through your 20 years of retirement.
Because of inflation, the math behind figuring out how much you’ll need to save can be a bit complicated. Yes, you’ll likely spend millions of dollars over the course of your retirement, but once you figure out the net present value of the amount you need to have at retirement and come up with a plan to save up that money over the several decades you’ll be working, you’ll realize that it’s not as difficult as it sounds.
Figure Out How Much You Can Save
In order to figure out how much money you need to save, you also need to figure out how much you spend. That means recording every single expenditure you make to figure out your total spending. Put that against your income and see how you come out. Figure you where you can save money and cut back on spending. Once you’re able to do that, start the actual saving process.
You can set up your direct deposit so that 10%, 20%, or 30% of your salary is sent to a secondary bank account that can be used for investment. Or if you have a workplace retirement account such as a 401(k) you can set things up so that your investments are already taken out before you even see your paycheck. Just like with taxes, having that money taken out before you see it lessens the pain. It’s hard to miss something that you never had in the first place.
Max Out Your 401(k) and IRA
If you have a workplace 401(k) account and an employer match, the very minimum you want is to max out your employer match. That’s free money available to you that many people don’t take advantage of, to their detriment. But remember, that’s just the minimum.
If you have the financial means to do so, max out your 401(k) and IRA. The limits on annual contributions to 401(k) accounts will increase to $19,000 in 2019, while the limit for IRAs will increase to $6,000. Not only does that maximize the amount of money that you can save, but it also decreases your tax liability in the short run since contributions to 401(k) and IRA accounts are normally tax-deductible (depending on your income).
Once you have funds invested in a 401(k), IRA, or TSP account, you can often transfer them tax-free to similar retirement accounts. That allows investors a great range of investing options than just stocks and bonds. Many investors today are choosing to move more of their assets into gold, taking advantage of gold IRAs to protect their assets in the event of a stock market crash.
Saving for retirement doesn’t have to be hard. Millions of Americans have done it before, so you can too. With a little knowledge and a little discipline, you can have the retirement you’ve always dreamed of.