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When Should I Start Saving?
So the simple answer to this question is, “as soon as possible.” However, how much you can save depends on a lot of factors.
Most Americans do not save early enough. In fact, over 60% do not begin to save for retirement until they are at least 30. This makes it much harder to accumulate the amount you need for retirement by the time you turn 65.
It is generally recommended that you save 10% of your income every month. This will help you take advantage of compound interest and avoid taking a hit from market dips. Compound interest can be very beneficial in the long run and grows your money faster than simple interest. Compound interest is a great way to get your money to work for you.
Compound interest is when the interest on your initial investment gains interest. To put it simply, it refers to the interest gained on your interest.
Of course, 10% is not always possible. If you can forgo eating out once or twice a month, buying more affordable clothing, or saving money on store bought coffee, you can probably save more than you realize.
If you can’t find a way to contribute 10% or even 5%, you should still start saving now. Even if you can only put aside $50, or even $10 a month, it will still add up. Not only that, but it will get you used to saving in general.
A good reason to save early is because there will always be unavoidable costs such as home repairs, children, medical bills, and car maintenance. If you start to save early, it won’t matter if you can’t contribute as much for a month or two because you have already been so good about saving.
The longer you wait to save, the more you will have to catch up in order to hit your goal. For example, if you have a 8% rate of return and start saving when you are 25, you would be able to hit $1.7 million with less than $500 a month. However, if you just wait 5 years, you would have to save over $700 a month to hit the same amount.
It is always best to plan ahead and you can do so by using age. Experts often suggest that your savings should equal your annual income at 30 years old. Then, by 40 you should have 2 times your salary, at 50 four times, and 60 six times. Then, you will hopefully have eight times your salary by the time you turn 67.
The sooner you save, the easier it will be to reach your retirement goals. But how much do you actually need to save in order to comfortably retire?
How Much Do You Need to Retire?
Sure this amount will vary depending on your lifestyle and plans, but the general consensus among financial experts is that you need to accumulate enough to have about 80% of your retirement age income each year.
For example, if you make 100k a year when you retire, you need to have 80k a year to retire comfortably. This estimate includes any money you will receive with pensions or social security and any other investments you may have. You may also need more if you plan on traveling a significant amount after you retire.
The average amount needed is around $1.7 million according to a survey conducted by Charles Schwab. This is only an average however so depending on lifestyle, medical bills, and other important factors it could increase or decrease substantially.
Ways to Save More
There are some things you can do to make it easier to save enough. These methods will help you whether you start saving at 20 or 40.
401(k)
This is the largest source of retirement savings in the country and is a great way to avoid taxation on the funds you are putting aside. The biggest tip is to take advantage of your employer match. This money is free to you so take it! Many employers will increase the amount they match for each year or 5 years that someone works for them (until a certain cap).
IRA
An IRA is an Individual Retirement Account. If you are self-employed or your employer doesn’t offer a 401(k), then this is a way you can still save plenty for retirement. Even if you have a 401(k), it is a good idea to open up an IRA and consistently contribute to it.
A Traditional IRA is one where your money will grow tax-deferred. In addition, the contributions themselves may be tax deductible. A Roth IRA is one where your contributions are made after taxes are withheld. Withdrawals from a Rt=oth IRA are typically federal tax-free as long as you meet certain conditions.
Don’t Depend on Social Security
Social security is great, but it will not provide you with enough money to retire comfortably on its own. It is best to not add it into your plan for retirement and then it will just be a little extra when you are able to withdraw.
Stocks
Stocks are often thought of as risky, but if you are young you can have a certain amount of risk and temporary dips in the market won’t harm you. This is the best way to save while you are young. In fact, you should have around 50% of your savings in stocks because they offer the highest rewards.
However, because there is a high amount of risk involved, you will want to move your money out of stocks when you get older. By the time you are 55 you should have moved all of your retirement funds out of stocks and into safer assets, such as bonds.
You shouldn’t pick specific stocks on your own because beating the market is rare and even then it likely won’t last long. Instead, invest in ETFs which are low-cost index funds. ETFs track the market or a segment of it. This can help to diversify your portfolio and limit your risk.
Mutual funds are similar to ETFs, but will have active management that will try to increase your returns. You need to pay attention to any fees that may be charged, the performance, and money fluctuations.
Young people may want to invest in a plethora of stocks from small cap to large-cap and worldwide. This ensures that if a sector of the market dips, they still have additional stocks that remain unaffected.
Another option is AMIAs or automatically managed investment accounts. They have a computer manage your portfolio so that you don’t have to worry about doing the work yourself.
Financial Advisor
A financial advisor is not for everyone, but they can help you plan your retirement goals and enact a plan to reach them. They can help you see the advantages and disadvantages of different investment options. If you get easily stressed by making financial decisions, it may be a good idea to schedule a consultation.
Stay Consistent
This is important because you need to continually contribute to your retirement throughout the remainder of your career. You need to save a percentage or set amount every month that is comfortable for you. If you get a raise and can increase the money, do so.
It is also incredibly important to leave you money alone. It needs to build interest and the more there is the more you will gain. Not only that, but you will likely need it all when you retire so taking any out now does more harm to you in the future.
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