A financially comfortable retirement is everyone’s dream. And in order to live that dream, you should start saving early. But the million-dollar question is- how much money do you need to save for those golden years? Unfortunately, there’s no real answer to this question. People have different ideas about how much to save for a smooth transition from work life to retirement. There are several variables involved, and all of these variables play a part in determining how much you manage to save in your retirement fund. However, based on research data, financial experts suggest some general guidelines to plan your retirement.
Guidelines to Save for Your Golden Years
Saving for retirement is not just about how much money you set aside. It’s also about how soon you start and how long you invest. More importantly, it’s also about meeting a good ‘replacement rate.’. This is a term used by financial experts to refer to the percentage of your salary that you will receive from retirement benefits after you stop working. This rate sets the target for saving as much as you need to continue your current standard of living even after you retire. A replacement rate of 70%-80% is considered ideal for a comfortable retirement. But how can you achieve this rate?
1.Start saving early. Putting money in your 401(k) or IRA retirement account is crucial. How much? The thumb rule is 10% to 15% of your annual pre-tax income. But the key is to start investing while you’re still young. For instance, if you start at the age of 25, you can get away with contributing just 10% of your income towards your retirement fund. But if you wait till you’re 40 or older, you may have to set aside at least 27% to 30% of your income towards retirement. Remember this- the earlier you start investing, the longer you have for your investments to grow.
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2. Work longer. Most people plan to retire at the age of 67 when they become eligible for Social Security benefits. But if you wish to retire earlier, you may have to save more than 15% of your income each year. The only way to reduce this rate is to work longer and delay retirement.
3. Up your contributions. Have you reached your automatic contribution limit in your 401 (k) or IRA accounts? If not, consider increasing it to the maximum extent possible.
4. Diversify investments. Markets tend to fluctuate. If you have too much invested in stocks, you may be running a high risk of losing your retirement savings. On the flip side, investing too little may bring no significant growth. So, evaluate your investments every now and then. Make sure you have a diversified mix of investments and you put the right amount of money in each.
Saving 15% of your annual income may not be easy. And you may find it hard to hit this target each year. After all, you’re likely to have other financial obligations such as a mortgage, credit card bills, and other expenses. But don’t forget to plan for your future. Revisit your budget and cut down expenses as much as possible to put more towards your retirement fund. Make saving for retirement a top priority!