Preparing for a secure retirement should enjoy priority as a financial objective. However, the amount each person needs to start saving every month depends on various factors, including how long you expect to work, the performance of your investments, and your financial obligations in retirement.
“How much should I save for retirement?” is often a perplexing question. If you are asking it, you came to the right place. In this guide, our team at Oxford Gold Group discusses the philosophy of saving for retirement.
What Percentage of Your Salary Should Go Toward Retirement?
Most financial advisors recommend that their clients set aside 15% of their pre-tax salary for retirement. While this rule of thumb provides a valuable guideline for retirement saving, it assumes that:
- You started saving in your early twenties
- You want to retire by age 65
- You need an annual retirement income equaling 50% to 80% of your pre-retirement income
- You have other sources of income, such as Social Security income
This rule also assumes that you have the means to contribute 15% of your income to your retirement savings. If you are 35 or older, the 15% guideline might lead you to be behind on your savings. However, you can still implement an effective retirement plan even if you are older.
How Much Has the Average Person Saved for Retirement?
According to information by the Transamerica Center for Retirement Studies, the estimated median household retirement savings in the United States is $93,000. Approximately 22% of the American population has less than $5,000 in retirement savings—and 15% has no savings.
A study by the Federal Reserve found that 54% of non-retirees in the United States house retirement savings in defined contribution pension plans, including 401(k) plans. Traditional, Roth, and SEP individual retirement accounts (IRAs) are also popular retirement savings instruments, with 33% of non-retirees holding savings in these accounts.
Other retirement savings accounts and assets include conventional savings accounts, defined benefit pension plans, businesses, and real estate.
How Can Starting by Saving Small Help?
The time value of money plays a significant role in retirement planning, and it is the saving grace of those who can’t afford large deposits. Through compound interest, a small amount that you invest consistently early in your life can grow to a substantial amount by the time you want to retire.
For example, suppose you are 25, and you start investing $75 per month at a rate of return of 6%. At retirement, your asset value will be $150,109. However, if you start investing $100 per month at the age of 35, your asset value will be $100,954 at retirement, assuming a similar rate of return.
As you can see, small savings can be valuable to your investment strategy over the long haul. However, dialing up your contributions as your income grows is critical to keeping your retirement savings on track.
Estimating Your Future Expenses
As part of retirement planning, you need to determine how much you will spend in retirement. Generally speaking, maintaining the same living standard requires lower spending in retirement.
As a retiree, you will only pay tax on a portion of your Social Security benefits, reducing your federal tax obligation significantly. You will no longer pay Medicare and Social Security taxes. Most people pay off their mortgage before retiring, and you might only need to pay property taxes and insurance.
In retirement, the costs of work clothing and commuting also decrease. However, you will encounter additional expenses, such as health insurance premiums. Some people also travel more in retirement, which ramps up their expenses.
Does Your Employer Match Your Retirement Fund Contributions?
Reaching your retirement goals becomes significantly easier if you have an employer who matches your contributions. In the case of a traditional IRA or 401(k), your employer’s contributions don’t form part of your taxable income for the year.
If you have a Roth IRA, you will pay tax on these contributions, though your withdrawals are tax-free.
Maximizing your employer’s contributions is essential when determining how much to save for retirement. Aim to save the maximum amount that your employer will match.
Saving for Retirement If You Are Self-Employed
If you own a business, you can’t take advantage of an employer-sponsored plan, and you need to make higher contributions to grow your savings. Various retirement savings plans are available to business owners, including traditional and Roth IRAs.
You can also consider a Simplified Employee Pension (SEP) IRA, which is a savings account suitable for business owners. A SEP IRA is a tax-deferred account but with a significantly higher contribution limit than a traditional IRA.
When opening a SEP IRA, remember that contributions to your employees as a percentage of their compensation must equal the contributions to your own SEP IRA.
How Much Should I Save for Retirement? Savings by Age Bracket
Saving for retirement is one of the most crucial financial goals, and you should start contributing to a pension plan or IRA as soon as possible.
However, planning for a comfortable retirement is only one aspect of sound financial management. Paying off your existing debt is crucial, especially if you pay high interest. You should also make sure you can pay unforeseen expenses without needing to take out an expensive line of credit.
If you have children, you want to contribute to a college fund. A designated educational savings strategy will ensure that you won’t need to pay college or university fees from your retirement savings.
The sections below discuss the ideal savings at each bracket to help realize your retirement goals.
How Much Do You Need to Save in Your 20s?
Most people in their 20s don’t have extensive financial obligations such as mortgages, which might make it easier to save for retirement. However, your income might still be relatively low, limiting your ability to save.
When you receive your first paycheck, your first step should be to enroll in your employer’s sponsored retirement plan. Try to contribute at least 10% of your income to your retirement savings or the maximum amount that your employer will match.
You should also start building an emergency fund in your 20s. This fund should be sufficient to pay for your living expenses for three months, should you lose your job or encounter another emergency. Contributing to an emergency fund is a crucial part of retirement planning as it eliminates the need to tap into your retirement savings while facing financial difficulty.
How Much Do You Need to Save in Your 30s?
During your 30s, your emergency fund should grow to an amount worth six months of living expenses, especially if you have children or other dependents. Make sure that you house your emergency fund in a high-yield savings account.
If your income increases, prioritize high-interest debts, ensuring you repay them as soon as possible. Repaying all your student and credit card debts is a reasonable financial goal for this age bracket.
Your retirement savings should equal three times your annual salary by the end of your 30s. If possible, increase your retirement contributions to 15% of your income. Increasing your contributions incrementally by 1% per year might make reaching your retirement savings goals easier.
How Much Do You Need to Save in Your 40s?
By the time you reach 40, you should have an emergency fund that can provide for your household’s needs for six months should you lose your income. Once you have a high-yield emergency fund, you can focus on your retirement and other financial objectives.
If you didn’t contribute to a retirement account starting in your 20s, consider increasing your contributions, especially if your income increased. As a guideline, your retirement savings should equal six times your annual salary when you reach the end of your 40s. Reaching this goal might warrant a contribution increase to 15% or higher.
In some cases, people reach their 401(k) contribution limits. If this is the case, you need to open and contribute to a traditional or Roth IRA.
How Much Do You Need to Save in Your 50s?
When you reach your 50s, your retirement age is drawing closer, and you need to take several steps to ensure that your retirement savings are sufficient.
Review your emergency fund, ensuring that it can sustain you through financial difficulty for at least six months. In this age bracket, your emergency fund might have already earned significant returns and should be sufficient, especially if your children are independent.
Once you turn 50, you become eligible to increase your contributions to tax-advantaged IRAs. Take advantage of these higher thresholds, especially if your retirement savings are not on track.
As a guideline, your retirement savings should equal seven times your annual salary when you turn 55. When you turn 60, your retirement savings should equal eight times your current annual salary.
How Much Do You Need to Save in Your 60s?
When you turn 60, consider increasing your emergency fund savings to equal one year of living expenses. You can use this fund for unexpected expenses, such as out-of-pocket healthcare expenses, vet bills, or home repairs.
Aim to grow your retirement savings to 10 times your current salary by the time you reach 67. However, in many cases, people struggle to reach these retirement goals.
You might be eligible to receive Social Security retirement benefits that supplement your retirement income. Some part-time jobs for pre-Medicare retirees also offer health insurance.
How Can Investing Improve Your Retirement Life?
If your contributions to your retirement and emergency funds are sufficient, consider making additional investments into a brokerage account. These accounts typically earn relatively high returns and are useful for reaching long-term pre-retirement goals.
When you are younger, consider more aggressive investment strategies to maximize capital growth. For example, in your 20s, consider funds with an asset allocation that gives you more exposure to equities.
As you get closer to retirement, capital preservation is more important than growth, and your portfolio should become more conservative. A bond allocation percentage of 40% to 50% is generally suitable to mitigate risks.
Considering Gold IRAs
A gold IRA is similar to a traditional IRA in that it is a tax-deductible retirement account. However, where a traditional IRA lets you invest in securities such as bonds and equities, a gold IRA lets you invest in precious metals.
Investing in a gold IRA allows optimal portfolio diversification, minimizing your exposure to market fluctuations. These accounts also hedge against inflation as the gold price tends to increase during inflationary periods.
Contact Us at Oxford Gold Group
How much should I save for retirement? Is a gold IRA a viable investment option for my financial situation? To get the answers to these questions, call us at (844) 446-0639 to get in touch with one of our representatives at Oxford Gold Group and learn more about gold IRA investing.
