How Much Should You Put Away for Retirement?
Saving for retirement isn’t an easy task as it seems. Which amount should be enough to save? That question requires much more calculating than you would think at first glance.
There is no standard rule to rely on, like saving 10% of our annual income. But while 10% may be enough for some people, it won’t be for others. There are several factors, though, that determines how much you must save annually for retirement.
Everyone’s retirement will be different. As a result, how much you must save is also unique. Some people want to plan for a quiet retirement at home. Meanwhile, others will prefer to travel frequently. Some could be retired for 30 years, or more and others may spend only a decade in retirement. However, these differences have a major effect on retirement cost, and they define how much you have to save each year.
There is another factor; namely, 10% of annual income is different for everyone. If you’re earning $300,000 per year and saving 10%, or $30,000, you should have no problem retiring on your nest egg. However, if you’re making only $30,000 per year and are putting away just $3,000 of that for retirement, you will probably come up short.
How soon you begin saving for retirement and what you invest in a matter a lot too as they determine how much money you’ll get from investment earnings. Even though you can’t predict the rate of return on your investments, at least you can control when you begin saving. And starting as young as possible is one of the best ways to ensure you’ll save enough, considering your earlier contributions will have the longest possible time to grow before you have to use them.
How does it work exactly?
Let’s say you saved $500 per month starting at 25. If you earn a 7% average annual rate of return, you’d have saved close to $1,236,000 by the time you’re 65. However, if you didn’t begin saving until you were 30, then you’d have approximately $856,000 by the time you’re 65. That’s in case if you saved $500 per month and made a 7% average annual rate of return. If you want to end up with $1,236,000, you’d have to begin saving $722 per month starting at 30. That’s about $222 more than if you’d begun at 25.
There are too many factors at play in determining the cost of your retirement, as well as the rate at which your savings will grow. That’s you can’t rely on a simple formula such as saving 10% of your income. However, you can try to come up with a personalized retirement plan. It will give you a much better grasp of what you’ll need.
How can you estimate how much you need for retirement?
You should start with the following questions: When do you want to retire? How much do you think you’ll spend annually in retirement? How long do you think you’ll live? How much money can you expect from other sources like a 401(k) match, Social Security, or a pension?
After you answer these basic questions, you can start making a plan. If you subtract your estimated life expectancy from your preferred retirement age, you will estimate a rough length of retirement. Then it would be best if you multiplied your average annual retirement costs by the number of years you think retirement to last, but don’t forget to add 3% annually for inflation. You will get a rough estimate of the total cost of retirement.
However, consider that you won’t have to save all this money on your own if you have investment earnings. There can be a money flow from one or more of the other sources. It would help if you talked to your employer to learn about 401(k) matches you may qualify for or any pensions. You can also create a Social Security account and estimate your Social Security benefit in retirement.
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