As you go through life, you’re going to have several financial goals. One of the biggest ones, however, will be putting aside enough money so you can live comfortably when you’re retired. However, this does lead to one big question:
How Much Should I Save for Retirement?
Unfortunately, there’s no definitive answer to this question. It depends on several factors, including:
- When you start saving for your retirement
- Your salary
- Where you invest your retirement fund
- What age you plan to retire
However, there are some rules of thumb that will help you determine how much you’ll need to save.
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Determine Your Retirement Income Needs
The best way to figure out how much you’ll need for retirement is by making an estimate of how much income you’ll need once you retire. In order to do this, take a look at your current spending plan, and think about how your budgeting categories will change once you retire.
For instance, you might not need to spend as much on gasoline, since you won’t have to commute to work, and you might not have to worry about making mortgage payments. On the other hand, you might want to create a budget category for traveling, as well as other recreational activities, such as tennis, golf or a senior center membership. You’ll also need to think about how long you plan on using your retirement funds.
If all of this sounds intimidating, you’re not wrong. This approach requires a lot of time and effort, not to mention trying to figure out what your life will be like when you’re at retirement age. However, you shouldn’t feel like you have to get this number right the first time you try to figure it out. As the years pass and your financial situation changes, you should start to get a clearer picture of how much money you’ll need to sustain your retired life and adjust your goals appropriately.
On the other hand, if you’re so overwhelmed by this concept that you have no idea where to start, you can get help from a reputable financial planner. They’ll be able to help you estimate your future income requirements and give you some tips on when you should reevaluate your estimate.
Use a Rule of Thumb
Of course, if retirement is still a long way away, you might not want to make a guess at what will happen in the next few decades. This is where rules of thumb come in. They won’t be as precise as estimating your post-retirement income needs, but they will get you off to a good start.
The 80% Rule of Retirement Saving
One of the most common guides for determining retirement savings is that you should save up enough so that when you retire you’ll be able to replace 80% of your current income. Having said that, some people suggest trying to save only 70% of your income, at least when you’re first starting out, while others suggest being more conservative and saving 90%. If you use this rule, you’ll have to figure out what goal you’re comfortable with.
The 15% Rule
Another good rule of thumb is to save at least 15% of each paycheck. If money is tight, you can reduce this amount to 10%, while if you’d like to take a more aggressive approach you could raise this amount up to 20%.
Use a Retirement Calculator
A retirement calculator won’t help you estimate your savings needs as precisely as determining your future income needs, but it’s not as general as following a rule of thumb.
Most retirement calculators will want you to at least put in your age, your salary and how much money you have saved up. From there, the retirement calculator will use some preprogrammed numbers, such as inflation projection, market returns and life expectancy to let you know how much money you’ll need to have saved, as well as where you stand in regard to reaching your goals.
Advanced calculators might also want you to put in a customized savings goal, as well as how many years you’ll want your retirement fund to last (aka, your life expectancy).
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Retire in Comfort with First Alliance Credit Union
The question of “how much should I have saved up for retirement?” has a different answer for everyone. The only real way to know how much you’ll need to save for retirement is to estimate all your expenses in retirement and think about how long you’ll need your retirement fund to last. However, when you’re just starting out you can get a good idea of how much you need to save by using a retirement calculator or just putting aside at least 15% of each paycheck into a retirement fund.
You can also get help preparing for retirement by becoming a member of First Alliance Credit Union. You can start saving money in a traditional savings account, then transfer your savings to a high-yield savings account like a money market account or even put it in a certificate of deposit or an IRA or Roth IRA. You can even download our free SMART goals packet in order keep track of your progress.