Saving money is crucial to a secure financial future. After all, you probably don’t want to work every single day of your life. If you’re going to have enough money to enjoy your later years or to retire early, you need to think about tomorrow, today.
If you feel overwhelmed by the prospect of the setting aside enough cash for a 30-year retirement, you’re in good company. In fact, it seems that a majority of Americans haven’t even saved enough for next month. According to a GoBankingRates survey, 69% of American adults had less than $1,000 in savings. Even more startling, the Economic Policy Institute found that approximately half of U.S. families had zero funds in retirement savings.
While you may not have enough saved now, all is not lost. If you start to put money in your 401(k), traditional IRA, Roth IRA, or other other investment accounts now, it will pay off in the future, no matter your age. But how much should you have saved now, and how much do you need in the future? We’ll break it down below.
How Much Savings Do You Really Need?
It makes sense that you should save for the future. After all, you probably don’t want to work forever, and having a healthy net worth is your ticket to ride off into the sunset. But exactly how much do you need to have saved when you decide to hang up your hat and enjoy retirement?
Well, it depends.
There are several questions you can ask yourself to help determine the magical number you’ll need in the bank at the end of your career.
- What is your desired retirement age?
- Will you be moving to a cheaper or more expensive state to retire?
- Do you expect to spend more or less than you do today in retirement?
The answers above will be unique for each individual, and therefore the amount of savings you’ll need to have at retirement will vary.
However, there are some guidelines to help you understand if you’re on track to reach your savings goals. The chart below outlines how much experts recommend you have saved at each age. For instance, if you make $50,000 in gross income and are 35 years old, you should have two times the equivalent of your annual salary in savings, or $100,000.
If you’re not where the experts recommend you should be — don’t despair. You can adjust your answers to the questions above to fit your specific situation. If you’re behind, you can compensate by moving back the age at which you decide to retire, or decreasing your living expenses. While advisors typically recommend you assume that you’ll spend between 70% and 100% of your current monthly expenses in retirement, you can minimize your monthly outlay by moving to a less expensive area, or cutting back on luxury expenses like travel.
On the other hand, if you’re ahead of the game, you can move up your retirement age, or decide to spend a bit more on your monthly expenses.
No matter where you find yourself on the savings spectrum, there are plenty of creative ways to save money that can help you make up for lost time, or accelerate your trajectory toward retirement. Even putting a little extra away each month can help you toward your goal.
But First, An Emergency Fund
Before you start socking away a certain percent or specific dollar amounts of your salary into your retirement accounts, you should first make sure you have enough in an easily accessible emergency savings fund. A good rule of thumb is to have at least six months of savings set aside for a rainy day. For instance, if your monthly expenses are $2,500, at a minimum, you should have $15,000 in savings.
While you might feel secure in your current job, or certain that your health will be good for many years to come, there are no guarantees. Take, for instance, the catastrophic job loss of the Great Recession. Between 2007 and 2010, around 8.7 million people suddenly found themselves unemployed. And finding a new job is no walk in the park — even with today’s booming economy, it still usually takes at least 100 days to find a new role in most industries.
While we don’t want to be a Debbie Downer, it’s also no secret that the U.S. has the most expensive healthcare system in the world. What would you do if you were to have an accident, or were suddenly diagnosed with a serious illness?
By saving a minimum of six months of expenses — although some financial experts recommend between eight and 12 months — you can weather potential financial disasters, and stay the course toward your financial goals, even in the face of unexpected life events.
Start Saving Early in Your Career
Once you have enough saved for an emergency, you can get more aggressive about saving for your retirement. And the earlier you start saving in your career, the better.
You may not feel like you need to think about saving for your twilight years while you’re in the flower of youth, but there are many arguments as to why you should.
Even if you have outstanding debt — such as student loans — it’s still important to put aside enough of your annual salary in your 401(k) to capture any company match that your employer may provide. It’s essentially free money, and even if it seems like pennies today, the earlier you can start padding out your retirement fund, the better.
But why? The answer is simple: compound interest.
One of the most powerful tools at your disposal, compound interest means that for every compounding period — usually monthly or annually — your balance will earn interest on its own interest. That’s right. Your money is making money.
For instance, let’s say at the age of 25 you decide to put $500 in your retirement account. If you were to do absolutely nothing else — and assuming a rather conservative interest rate of 5% annual return on your investment — that $500 would become more than $3,500 by the time you were to retire at 65. On the other hand, if you were to put aside that amount at the age of 45, your $500 would only grow to $1,327.
Invest early and often, and you’ll be set for life.
Another reason you should put money aside while you’re still relatively young is the ever-present threat of lifestyle inflation. Generally, people tend to spend their money as fast as they make it. As your annual income grows, so do your expenses.
But if you can make saving a specific percent of your salary a habit early in your career, you can acclimate yourself to a less expensive lifestyle. Save it before you even see it and your savings — retirement or otherwise — will grow almost effortlessly.
The same goes for any unexpected extra money that comes your way. If you get a bonus, why not put it away in your retirement account instead of buying the newest fancy gadget? As we’ve seen, even a small infusion of cash in the present can grow dramatically in your retirement account over time.
When you’re young, you often have more flexibility and fewer responsibilities. While many recent graduates may feel they can’t save for retirement because of hefty student loan payments, imagine trying to build that habit of regular investing when you have to pay for childcare, a mortgage, your child’s college, and healthcare costs.
Saving when you’re young is much more doable because you likely have fewer expenses, as well as the flexibility to move for a higher-paying job if necessary, or to a less expensive city. Those are luxuries that often don’t exist in later adulthood.
Account for Inflation
Another key reason to save early and let compound interest work its magic is the boogieman of retirement: inflation. In 30 years, $1 will not have the same buying power as it does today. For example, using the historical average of 3% inflation, a $1 pack of gum today will cost $2.42 in 30 years.
Imagine what that would mean for your retirement savings.
The above chart can help you determine just how much your yearly expenses will be once you retire. In the left hand column, choose the amount that most closely matches what you plan to spend (in today’s dollars) each year of retirement. Then, find the intersection of that dollar amount and the year that you plan to retire. For example, if you plan to spend $60,000 per year during retirement, and you would like to retire in 30 years, then you will be spending $146,000 during your first year of retirement.
As you can see, the impact of inflation on your retirement savings should not be underestimated. Although inflation levels have been relatively low at 1.5% since the 2008 recession, you never know what’s over the horizon. For example, retirees in the 1970s were profoundly affected by extremely high inflation rates that averaged over 7.00%.
Inflation is why the number you need in retirement is often so daunting. Not only will you need to cover your living expenses for 20 to 30-plus years past the date you retire, you’ll also need to account for the effects of inflation on the value of your money.
Get Started Now
You don’t need to be a personal finance guru to know that some savings is better than no savings. No matter what your age or income, the best time to start saving is now.
Even putting just $20 a week into savings can help you get ready for whatever lies in your future — whether that’s a rainy day, retirement, or an unexpected opportunity. Having some money put away can help ensure that whatever’s over the horizon, you can meet it with confidence.