Saving for retirement is a strange thing. It feels like a distant concern that you don’t need to worry about, but you also tend to have a constant nagging sense that you’re way behind with saving. Those two perspectives tend to cancel each other out in most people’s minds, so they opt to not do anything.
Today, we want to look at four important questions you should consider when it comes to saving for retirement. But first, let’s look at what the experts have to say, and then look at what the reality is of saving for retirement in modern-day America.
What the Experts Say When It Comes to Saving for Retirement
Every career and retirement plan is unique in some way, so how much you should have saved by the time you turn 40 (or 50 or 60) will depend quite a bit on your work history and financial goals.
That said, there’s nothing wrong with borrowing a rule of thumb to create a baseline estimate for figuring out whether you’re in the ballpark of where you’d like to be. Fidelity recommends the following rule:
“Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.”
They arrived at this rule by making several assumptions:
- You’ll start saving 15% of your annual income at the age of 25,
- You’re going to retire at 67,
- You’ll maintain your current standard of living in retirement,
- and more.
According to this “rule” you should have three times your annual income saved by the time you reach 40. The average 40-year-old earns $72,000 a year, meaning you should have $216,000 saved on your “over the hill” birthday.
Considering that the average baby boomer had $202,000 when they retired, that’s clearly not most people’s reality.
The Average Person’s Reality When it Comes to Saving for Retirement
The average 30-something has a 401(k) balance of $38,4000, and the average 40-something is at $93,400. That’s nothing to sneeze at, but still well below half of the recommended amount.
So what do you need to know to get your retirement savings on track? Here are four questions that can get you started on the right track.
Questions to Consider Before You Start Saving for Retirement
1. When do you want to retire?
There’s a significant difference between planning a relatively early retirement at 50 and accounting for 40+ years of funds, versus choosing to retire at 70 and potentially cutting your retirement period in half. For that reason, it’s important to figure out when you think you want to retire.
Of course, what you decide now may change. But for most people, if you enjoy working at age 30, you’ll continue enjoying work later in life and want to retire later, or vice versa.
The 21st century has seen the growing popularity of something called the FIRE movement—Financial Independence, Retire Early. FIRE devotees commit to saving 50 to 75% of their income so they can retire in their 30s or 40s. Really, most people in the FIRE crowd continue with some form of work after they retire; the movement is primarily about paying off all debt and freeing yourself from the requirement of full-time work.
The more traditional route is retiring somewhere in your 60s, which is why the earliest you can claim Social Security is age 62 and cashing out your 401(k) before age 59.5 will result in some pretty severe penalties.
2. What do you think you’ll want to do in retirement?
Again, this isn’t necessarily set in stone. Your circumstances are liable to change, and maybe your preferences will too. There’s a quantifiable difference though between a retirement that includes taking a cruise ship to exotic locations every year, and say, one that includes the startup costs of opening your own business.
Whether you think you’ll want to live close to family, or foresee a move (or many) to a more ideal location, these differences will determine a good amount of the cost of your future retirement.
3. How much can you afford to save right now?
This might seem trivial, but it’s not. There really is a difference between what you can afford to save right now, and what you’re actually willing to save on a consistent basis. A little bit of self knowledge can go a long way here, and help you moderate your expectations, but it’s important to stay disciplined.
Be honest with yourself: How much do you spend per month on things you don’t need? Some of the biggest and most common offenders here include:
- Eating out – the average American spends $3,000 per year on eating out, but it’s not uncommon to see twice that much among single 30-somethings.
- Cable TV – there’s really no excuse for paying $100 per month or more for cable anymore when services like Netflix, Disney+ and Hulu offer similar options for a fraction of the cost. If you need the live TV component, YoutubeTV and Hulu Live start at $65.
- Getting the latest version of everything – Sure, Apple puts out a new iPhone every year, but that doesn’t mean you have to have it. Getting a new iPhone every three years could literally save you thousands of dollars.
- Credit card bills – Credit card debt is a slow drip on your savings and will eventually cost you way more than you spent in the first place thanks to high interest rates. Prioritize paying off your cards as soon as possible.
One trick to maintain your savings rate to hit your retirement target exactly when you want to, is the “pay yourself first” policy. It’s pretty simple. You pay into your retirement savings before you consider any other discretionary spending, thus ensuring you stay on track by prioritizing your retirement savings.
4. How much risk are you comfortable taking?
This last question is personal, but it determines how aggressively your investment portfolio will be working toward your retirement goal. Obviously risk is an unavoidable part of investing, but how much risk are you okay with taking?
Traditional wisdom says the earlier you start saving, the more risk you should be comfortable with taking. As you get older and retirement comes nearer, your portfolio should incorporate less and less risk.
If you’re not actively saving for retirement now, start today with whatever amount you can. With a head start on savings you can afford to take those bigger investment risks, so if that’s your speed you can’t afford to wait.
Read further: How Much Money Do I Need to Retire?
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