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When it comes to retirement savings planning, there’s a lot at stake. You need to ensure that you have a large enough financial cushion to live comfortably for years (or even decades), but you also need to be able to support yourself and your family in the meantime.
Knowing how much money to set aside and the best investment vehicles to help your portfolio grow are highly individualized decisions, and there’s no one-size-fits-all answer. However, there are some best practices that are often recommended that depend on your current age and lifestyle goals.
Keep reading to get an answer to the question of how much should you save for retirement and when to start.
Determining Retirement Savings Goals
The first step in determining how much you need to save is to calculate retirement savings needs based on the following factors:
- Your current age
- Your desired retirement age
- The lifestyle you’d like to enjoy after you retire
- Your current budgetary needs
Often, you’ll hear mainstream financial advisors suggest setting aside at least 15% of your pre-tax income toward retirement. This approach makes a lot of assumptions, including that you start saving at a young age, you’re not actively growing your investment portfolio, and you plan on living an “average” lifestyle.
Another approach is called the 4% rule. This formula helps you determine how much money you’ll need in total when you retire. Again, there are several assumptions baked into this formula, so it’s not for everyone. If you’re curious, here’s how the formula works:
All you have to do is divide your desired retirement income by 4%. For example, if you want to have $60,000 per year in available funds to live on during retirement, you will need $1.5 million ($60,000 / 0.04).
Instead of following along with generic advice, it’s beneficial to evaluate your individual situation, including the factors below.
Current Age and Desired Retirement Age
Generally speaking, the younger you are, the more time you have to save for retirement. For example, if you plan on retiring at age 67 and you’re currently 30, you have 37 years to put funds away.
On the other hand, if you’re in your 50s and haven’t put away a nest egg yet, you’ll have to save more aggressively to live comfortably in retirement.
Expected Lifestyle in Retirement
It goes without saying that if you plan on traveling the world in style in retirement, you’ll need to save more money than if your lifestyle aspirations are more modest. It’s generally recommended to have enough money set aside so that you can live off of 40-45% of the salary you were earning before retirement. The remaining percentage could be subsidized by social security.
This figure assumes, however, that you’ll live the same lifestyle, and this may not be the case. You could live with less funds if you downsize, or you may need extra cash if you plan on traveling extensively or expect to have medical issues.
Other Financial Goals and Obligations
Retirement savings planning can also depend on your short and long-term financial goals, as well as other obligations. For example, if you have high-interest credit card debt, you are likely better off paying that down before setting aside significant funds for retirement. Student loans or the goal of buying a house may also affect how much you’ll be able to comfortably put away.
Savings by Age Group
Setting adequate retirement savings targets also depends on your current age, since the younger you are, the more time you are expected to have to build a nest egg.
20s: Building the Foundation
Saving for retirement at this age is an ideal time to start, thanks to compound interest. Even modest savings during this time can become significant by the time you reach retirement age. Aim for setting aside 10% to 15% of your income, if possible.
30s: Increasing Commitment
As your salary goes up with career advancements, you may have more disposable income to set aside. If this is the case or you hadn’t started saving in your twenties, it’s recommended to begin saving 15% to 25% of your income.
40s: Mid-Career Adjustments
As you reach the midpoint of your career and retirement age looms closer, it’s time to get more aggressive with saving. If you need to play catch up, try to save between 25% to 35% of your income. You can potentially get away with less if you started early or your portfolio is doing well.
50s: Nearing Retirement
By this point, retirement may be only a decade away, and time is of the essence. If you are still far away from your goal, financial planning for retirement should be your top priority. The more you can set aside the better, and it’s often suggested to save up to 45% of your income.
Types of Retirement Accounts
One of the worst things you can do with your retirement savings is to put them in a bank account and watch inflation eat away at your financial safety net. Instead, there are plenty of safe places to store your money that will provide you with interest. As you know, having your money work for you is key to building wealth, both now and during retirement.
The good news is that you have several options available to you as an employee of an organization, as well as independent avenues to fund your retirement.
401(k) and Employer-Sponsored Plans
Many businesses offer retirement savings plans as a benefit to their workers. These plans can be an effective way to plan for retirement while also taking advantage of some “free” money if your employer matches your contributions.
401(k)s and employer-sponsored plans work by allowing you to contribute a portion of your pre-tax paycheck, and the funds can grow tax-deferred until you withdraw them.
Individual Retirement Accounts (IRAs)
In addition to a 401(k), you can also make tax-deductible contributions to an Individual Retirement Plan. In addition to putting away tax-deferred income, an IRA can also grow in value due to the ability to own several asset classes inside different types of IRAs. For example, a self-directed IRA allows you to invest in real estate and precious metals, including gold.
Other Investment Options
One of the biggest benefits of having an IRA is the ability to defer taxable income. However, IRAs have annual contribution limits, so you are unlikely to be able to gather enough funds using an IRA alone. Other taxable investment vehicles include:
- Stocks
- Mutual funds and exchange-traded funds (ETFs)
- Bonds
- Cryptocurrency
- Precious metals
- Annuities
- Real estate
Factors To Consider When Estimating Your Retirement Needs
Calculating retirement savings needs requires thinking through what you’ll need to live comfortably during retirement without the benefit of having a crystal ball.
By thinking through the following factors, however, you can get a reasonable estimate of your retirement needs:
- Basic Living Expenses: Consider things like mortgages, rent, and food expenses. If you plan on living in an expensive area, you should adjust your plans accordingly.
- Healthcare Costs: Medical expenses can be significant, especially as we age or encounter health problems. Be sure to plan for your medical care as you advance in age.
- Leisure and Hobbies: Retiring doesn’t mean you’ll be spending life on the couch. Consider what funds you’ll need for travel, new hobbies, or other activities you want to enjoy during your golden years.
How Can You Maximize Your Retirement Savings Through Investments?
Interest-bearing accounts can help you grow your retirement fund, and several other smart retirement savings strategies can have a magnifying effect.
Investing is considered a smart strategy, but it does come with risk. The following recommendations put you in a more favorable position for wealth accumulation as you approach retirement:
- Start as early as possible. When you are young, you can typically afford to take on more risk. Because risk and reward are often directly correlated in investments, you can have some big wins early. And, in a worst-case scenario where an investment doesn’t pay off, you have plenty of time to recover.
- Diversify your portfolio. There is no such thing as a surefire investment, so you can reduce your risk by investing in a variety of asset classes, including precious metals.
- Take advantage of dollar-cost averaging. This strategy involves investing a fixed amount of money at regular intervals. The idea is that instead of trying to time the market perfectly, you can smooth out market volatility while consistently growing your portfolio.
When Should You Start Saving?
You’ve heard this saying before: “The best time to plant a tree is 20 years ago. The next best time is today.” It’s true that the earlier you start, the better, but you still have time to save for retirement. This is true even in your 50s. The only difference is that you might have to adjust your contributions and overall strategy.
No matter what your age, it’s a good idea to reevaluate your retirement savings strategy. Further, if your current portfolio doesn’t include precious metals, it might be time to consider this diversification strategy. To learn more about maximizing savings for retirement, contact Oxford Gold Group.
