“How Much Should I Save?”
How much should I save for retirement seems like a short, sweet question. However, there is a lot that goes into the answer.
The General Answer
You should aim to save 10 – 15% of you gross income. This is the income before taxes, deductions, and anything else that gets taken out your paycheck. For example, if your salary is $120,000, you usually do not get to keep all $120,000. There are taxes, Social Security, retirement plan contributions, etc that are taken out. Your gross income is $120,000 and whatever you keep is called your net income. So, saving 10 – 15% of your gross income would mean saving between $12,000 and $18,000 per year.
Now, if you are just starting out in your career, you may be making less than that and also may not be able to save 10%. Work your way up to 10% savings. This may take several years to do, but it can be accomplished. If you are already saving 15% of your gross income and feel the desire to save more, please do. Perhaps you wish to retire early. Or perhaps you started saving later than you should have (more on this below).
A More Specific Answer
If you started saving fresh out of college, you may be able to save a lesser amount and still be well-cushioned at retirement. For example, if you started saving at age 25 and saved $1,000 a month for 10 years, you would have over $1.3 million dollars at age 65! That’s only putting in money for 10 years and letting the magic of compound interest take over for you for the other 30 years! (I am assuming a 7% return)
Most 25 year olds aren’t doing this. I’m sure most aren’t even thinking about retirement – I know I wasn’t at that time! Let’s say you didn’t start until you were 35. In order to have $1.3 million at age 65, you would have to pay about $1,065 every month for all 30 years! Again, I am assuming a 7% return.
Some Good News
You may not have to save all that money by yourself! If you work for a company that offers a match on your retirement contributions, I hope you are taking advantage of that. For example, if your company offers a 5% match on your 5% contributions, that’s 10% right there going into your retirement account each month! You are receiving free money! To read my blog post about free money, click here.
Long Story Short
You have a few options the longer you wait until saving for retirement.
- You will have less at retirement.
- You will have to contribute more toward retirement each month to get you to where you want to be.
- You will have to contribute for a longer time (and work longer) to get you to where you want to be.
- You will need a higher rate of return – 7% may not cut it.
On the flip side, the earlier you start, the less you have to do. Enjoy the ride!
