There comes a time in our lives when we will need – or want – to retire. Some individuals can retire sooner than others. Regardless of when you retire, you need to make sure you have enough money saved. So, how much do you need to save for retirement? Let’s dive in.
How Much to Save for Retirement
Asking yourself how much to save for retirement is a tricky question to answer. You need to take several factors into account. For one, how much you spend on average every year is something to consider, your annual salary (how much you make each year), and at what age you plan to retire.
The common advice is to have a retirement income of 70-80% of your pre-retirement salary. If your annual salary before retirement stood at $70,000, you would need approximately $49,000-56,000 per year for the rest of your life.
To start saving for retirement, however, it’s recommended you contribute between 15-20% of your annual income to your retirement account. Again, this depends on your living expenses, your salary amount, inflation, and how much time you have to contribute before you retire.
For a complete view of how much you need to save for retirement, here is a helpful retirement calculator by Nerdwallet.
Why Some Wait to Invest
First thing’s first: If you have not started saving for retirement, start today. The sooner you do, the more substantial your retirement savings will be.
Many put off saving for retirement for reasons like not having enough money. Or, perhaps they have already waited too long to start and feel that retirement is just around the corner. Some have debts or medical expenses that need to be paid, making saving a hard process. For others, it’s a matter of perspective. Why save a portion of my paycheck when I could use that for paying for things now or in the short-term future like bills and other expenses? While paying off debts and essential expenses should be a priority, so should saving for retirement.
Here’s another reason why you should not put off saving for retirement: compounding interest. Compounding interest is a powerful tool (especially for those who want to retire) that lets you earn interest on interest, which produces greater returns the more money you frequently contribute and the longer you allow it to sit.
To help illustrate this point, here’s an example: Person A makes an initial deposit of $100 for retirement starting at age 20 and makes a monthly contribution of the same amount at an estimated rate of return of 6%, compounded monthly. Person B makes the same initial deposit, monthly contribution, and has the same rate of return but starts at age 40. By age 67, Person A’s money will have grown to approximately $315,000, while Person B has only grown to a little over $81,000. That’s a $234,000 difference!
Even if the contributions are small, a small amount can go a long way in the future, thanks to time and compounding interest. Regardless of whether you start saving for retirement late in life, it will be better to have something than nothing at all. Donate what you can, when you can. Just like anything else in life, the hardest part is simply starting. Once you do, consistent saving becomes much easier. Investing also becomes easier when you start looking at it as paying or investing in yourself before paying bills and expenses.
How to Save for Retirement
There are a few ways that you can start depositing money and save for retirement. Plus, there are different places where your contributions will grow and earn you compounding interest. Here are some of the most common ones:
Contribute to a 401(k)
If you are employed and have the opportunity to contribute to a 401(k), take it.
Most employers offer a company match when you contribute a percentage of your paycheck to a 401(k). In other words, this is free money. Utilize this opportunity by matching their offer. For example, let’s say your company offers a 100% match on the first 5% you contribute from your salary to your 401(k). We’ll also pretend your annual salary is $50,000. If you match their offer by contributing 5% from your salary to your 401(k), or $2,500, your company will match that same amount, putting an extra $2,500 into your retirement account for a total of $5,000. Don’t forget that these contributions will earn interest over time, growing your savings.
The other benefit of contributing to a 401(k) is it can lower your taxable income. So if you contributed the maximum amount of $19,500 to your 401(k) for 2021, and your annual salary is $70,000, you would lower your taxable income to $50,500. By contributing to a 401(k), you are putting extra dollars to work, earning you dividends, which will help grow your retirement. These dividends are non-taxable until you withdraw your money when you’ve reached retirement age. By then, your taxable income will likely be lower, which means you will be taxed at a lower rate when you take money from your retirement account. Whereas, if you didn’t donate to your 401(k), you would have had to pay taxes on the amount you could have invested and missed out on potential earnings or growing your wealth.
Contribute to an Individual Retirement Account (IRA)
If your employer does not offer a 401(k) or doesn’t match any contributions, you can open an IRA instead. IRAs, such as a Roth or Traditional IRA, will allow you to earn interest much like a 401(k). There are many affordable online brokers and robo-advisors with investment portfolios designed to help you retire.
The other nice thing about IRAs is they allow you to roll over your 401(k). The downside is you will max out your contributions when you reach $6,000 each year or $7,000 if you are over age 50.
Save Money in a High-Yield Savings Account
Although a savings account does not earn you as much interest as a 401(k) or an IRA, it is still a secure place to save for retirement. It also acts as a safety measure if something unexpected happens – like a medical procedure that you need quick money to pay with.
In a way, this acts as a buffer from having to withdraw money from your 401(k) or IRAs. Early withdrawals from either of these can come with high-income taxes and a 10% penalty. Whatever you have in your savings can go toward your retirement when that time comes.
If you choose to save money for retirement, or emergencies, consider a high-yield savings account where your money will grow. Here at PrizePool, we offer a 0.30% Savings Bonus on your deposits. We also reward depositors with the chance to win weekly cash prizes to help grow their savings even faster.
Automatically Save or Invest
If you want your savings or investments to grow, set up automatic transfers to your retirement and high-yield savings accounts. Often, thinking about saving for retirement can get in the way if you are tempted to spend that money on bills or other expenses instead. By setting up automatic investing, you won’t see that money hit your bank account. And what you can’t see you won’t spend.
Unfortunately, many people wait to save for retirement until much later in life, when they have a job and start making some revenue. Others haven’t even thought about it or know how to. If anything, don’t wait to start saving for retirement. Start now! Your future self will thank you.