Planning for retirement can feel daunting, especially because you have to save a large amount of money for a time that’s probably pretty far off. It can be tempting to put off saving until you make more money or have your finances in better shape.
But the truth is in order to have enough money to live on comfortably in retirement, you need to save early and often. Just consider how much you could accumulate over time if you put away just $250 per month at an 8% average annual rate:
- Starting at age 25: $878,570 by age 65
- Starting at age 35: $375,073 by age 65
- Starting at age 45: $148,236 by age 65
You may be thinking, why not just contribute more later when you earn more? Well, catching up can be pretty tough because you’d miss out on years of compound interest. In fact, to reach that same $878,570 in retirement savings by waiting to start at age 45 vs. 25, you’d need to bump up your monthly contribution to about $1,545. Depending on where you’re at financially by then, that may not be possible.
A Retirement Savings Guideline
Everyone’s retirement savings needs are different. However, it can be helpful to have benchmarks for guidance. “At Fidelity, we’ve done extensive analysis to come up with age-based retirement savings factors that can guide retirement planning despite uncertainties,” said Kirsten Hunter Peterson, director of thought leadership at Fidelity Investments.
Here’s the minimum you should aim to save to stay on track, according to Fidelity:
- 1x your salary by age 30
- 3x your salary by age 40
- 6x your salary by age 50
- 8x your salary by age 60
- 10x your salary by age 67
“Based on those assumptions, we estimate that saving 10 times your pre-retirement income by age 67, together with other actions, should help ensure that you have enough income to maintain your current lifestyle in retirement,” Peterson explained.
So what would that look like? Let’s say at 30 years old, you earned a salary of $45,000. That means by this point, you should also have a total of $45,000 socked away for retirement.
Fast forward to age 50, and you’ve received a few promotions and raises. Now your salary is $75,000 per year. That means you should have six times that amount saved, or $450,000.
Finally, you’re ready to retire at 67. By this point, your salary has increased further and you’re now earning $100,000 per year. That means you need a total retirement savings of $1,000,000.
That might sound like a lot. However, keep in mind that with proper planning, you should have decades to reach your goal. And there are a few things you can do right now to make reaching that amount easier.
First, Peterson said you should determine when you plan to retire and what kind of lifestyle you want to live in retirement. These determinations obviously vary from person to person, and how you envision retirement might be different than the average person.
While you may not have control over all the factors that impact exactly when and how you retire, postponing that date does have some benefits. For one, you’ll have more time for your savings to grow. Plus, you’ll spend fewer years in retirement, meaning you won’t need as large of a pool of savings. You’ll hopefully receive a greater Social Security benefit as well.
Finally, be sure to take advantage of a tax-advantaged account, such as a 401(k) or IRA. These allow you to put more of your income toward retirement savings since you don’t have to pay taxes on the money upfront. Or, if you chose a Roth version, you can pay taxes now and allow your future self to make withdrawals tax-free.
In addition, if your employer matches retirement contributions, be sure to contribute at least enough to receive the full match. That’s free money that will compound for years to come, so don’t leave it on the table.
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