How Much Do I Need to Save for Retirement?

Whatever your income or profession, it’s never too early to save money for retirement. Here are a few things to keep in mind.

The 10% Rule

Most often people will tell you that you should set aside 10% of your money, preferably in a 401k. The benefit of doing this is clear. Assume you start at 25 years of age.

You put aside 10% of your $35,000 – $40,000 salary in this account. Getting a 2% increase plus the 8% annual return, you’d have more than a million dollars by the time you hit 65.

Assuming you get to withdraw 4%, you’ll get $60,000 for the first year. Even if your salary grew by 3% a year, you would still get about half of what you would have earned working. When you save money for retirement, you can also avail of Social Security.

Together, the money should be sufficient. This is assuming of course, that your lifestyle isn’t lavish.

Reality of the Situation

The abovementioned scenario is the ideal one. But we don’t live in an ideal world. There are a lot of things that can go wrong. For starters, it assumes that you started saving at 25. If you start a few years late, your savings will be smaller. It could mean less than half of your work’s paycheck.

Another factor is the annual return. You cannot presume that a 7% to 8% will continue for the next 20 to 30 years. To save money for retirement, some invest in stocks and the forex. That can augment your 401k, but it might not. These investments are based heavily on investor confidence and the economy. It can fluctuate greatly.

Last but not the least, getting that $60,000+ assumes you’ll be making $35,000 to $40,000 with increases for the next 30 years. It also presumes you’ll be contributing 10% without interruption for 30 years straight. That is why the save 10% rule isn’t as precise a guide as some think.

It doesn’t consider what will happen if you lose your job, don’t get a raise or if the contribution is stopped momentarily.

Saving Money as a Habit

This doesn’t mean you should not try the 10% rule to save money for retirement. The answer to the question of how much to save is simple: as much as you can. If you can save 10% do it. If you can stash away 15%, go ahead. Don’t rely too much on employer match funds. They are a nice touch, but if you switch jobs you can’t be too sure that it’ll offer the same perks.

Plan Now

Some people hire a financial consultant. Others use websites with financial planning calculators. Whatever method you use, it’s crucial you start now. Don’t think that just because you’re young you can wait till later to plan.

Start by making an assessment of how much you have stashed away. Evaluate how much you are able to save every week / month. This is the best way to learn how to save money for retirement.

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