Ask financial experts how much you should be socking away for retirement, and you may hear a wide range of numbers. Ten percent of your income. Fifteen percent. Twenty or more.
How about zero?
Putting little to no money into your retirement savings obviously isn’t a viable long-term strategy. However, it’s probably what you should be doing if you don’t have a few financial fundamentals taken care of, experts say.
Jake Heisler, a certified financial planner with Quaker Wealth Management in Moorestown, New Jersey, generally likes 10-15% as a retirement savings goal. But that’s contingent on a few factors.
“Are your cash reserves in a good place, that is 3-6 months?” Heisler asked hypothetically. “Is your debt under control? How about student loans?”
Rob Williams, CFP and director of financial planning at Charles Schwab, also advises a “fundamentals first” approach.
“We recommend 3-6 months of expenses in an emergency fund to provide stability before you start investing,” Williams said. He also stresses the importance of taking full advantage of your company-sponsored retirement plan, if you have one. And those high-interest credit cards?
“If you’re maintaining a high balance, pay that off before you start saving,” Williams said.
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Let’s say you do have those high-interest credit cards paid off. Your debt is under control, you’re getting your full match on a 401(k), and you have at least a few months of emergency funds stashed away.
When it comes to savings, what then?
As is usually the case in personal finance, how much you should set aside for the future will depend on your age, your life circumstances, and what type of lifestyle you hope to have when you retire.
Heisler’s 10-15% figure (which may include a 401(k) match) may make sense for someone in their twenties. Or it may not, if that person doesn’t feel settled on a path ahead.
“If you’re not really set on your lifestyle, you’re newer to your job, you might also want to look at something more liquid,” Heisler said. “If you’re young and single, saving is still important. But you have more flexibility.”
He added that particularly in the gig economy with its sometimes-less-reliable jobs, younger investors should be careful not to tie their wealth up too much. When it comes to savings in general, he gives millennials high marks.
“We tend to knock millennials for not doing certain things,” said Heisler, a Gen Xer. “But they seem to get that part right.”
In addition to concerns about tying up wealth too soon, 10-15% can be pretty daunting for someone just starting out. The same can be said of the old system of laying out 50% of your money for essentials, 30% for discretionary things and 20% for savings. If you can swing it, though, it’s possible to put yourself in a very strong position with aggressive savings in your younger years.
Williams acknowledged that many people start at closer to 2-3%. He suggests at least getting the employee match in your first job, and shooting for 10-15% savings in your twenties, with half of that from a company match, if you’re able.
“If you start in your twenties at 10-15% and maintain that, you’re going to have a well-funded retirement,” Williams said.
If you’re in your thirties and haven’t started saving yet, you may have to think higher than 10-15%, Williams said. If you’re in the same situation in your forties, the numbers might look like 25-30%, if you want to have high confidence that you’ll be able to maintain the lifestyle you want.
Those general guidelines and recommended percentages haven’t changed much, at least for the last 30 years or so. Since the 1990s, there has been an increased focus on saving.
“More people had pensions back then,” Williams said, “and people didn’t live as long.”
Is 75% of Your Income Still a Good Retirement Goal?
Maybe for some people, experts say. But be ready to spend more than planned.
“That’s where a financial advisor really comes into play,” Heisler said. “Maybe 75% is the average for across the country. Most of our clients don’t see a reduction in spending during retirement. It’s usually the other way around. Sometimes it goes up, with travel and medical expenses.”
Williams recommends getting a rough snapshot by looking at your current income minus your retirement savings and expecting to need at least the same amount. Like Heisler, he offered a plug for getting expert help.
“Talk with a financial planner and run your own numbers,” Williams said. “Look at what kind of lifestyle you want to live. That should tell you how much you want to save.”
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