When it comes to retirement, many Americans aren’t financially prepared. In fact, 52% of American workers say their retirement savings aren’t on track and an additional 16% aren’t sure if they are, according to a 2021 Bankrate survey.
Generally speaking, a comfortable retirement income should be about 75%-80% of your current paycheck, said Tom Siomades, chief investment officer of AE Wealth Management. So how much should you save to reach that goal? Here’s what Siomades and other financial experts recommend.
Start Investing as Soon as Possible
Financial experts recommend saving and investing for retirement as soon as possible to take advantage of the benefits of compound interest.
“When you first start saving and investing for retirement, it can almost feel agonizing because the dollar amount you are seeing from any positive returns does not seem very big,” said John Savarino, an investment advisor representative for Rooted Wealth Advisors. “This is because returns are relative. Compound interest will become more impactful, from a dollar perspective, the longer you save and stay disciplined with your savings.”
If you didn’t start saving for retirement in your 20s, it’s not too late to begin now. As long as you give yourself around 20 years to save and invest, you should still have a healthy nest egg to pull from in retirement, according to Peter Tanous, registered investment advisor and founder and chairman of Lynx Investment Advisory.
Save 5%-15% of Your Income Before Spending
When it comes to how much to save, expert advice varies between 5% and 15% of your income. The exact amount depends on your age, your retirement goals and desired lifestyle, and whether you invest before or after taxes.
“You should save as much as you are able to without getting yourself in a financial pinch,” Siomades said. “If you’re young (under 40), I would recommend saving 10%-15% of each paycheck and investing aggressively. As you get older, you should increase that and reposition yourself into a less aggressive investment posture.”
He also suggests making automatic deposits into your retirement accounts. This ensures that you invest every month and that your retirement savings take priority over other expenses.
Tanous said saving 5%-10% of your after-tax income is a good goal if you’re investing in a Roth IRA or similar after-tax account. Before determining an exact percentage, it’s important to analyze your current financial situation and your lifestyle expectations for retirement.
“Someone who earns and lives on $50,000 a year will have different expectations than a family with an annual income of $300,000–and the amount they save will be a function of these expectations,” Tanous said.
Take Advantage of Employer Matching and Tax Benefits
Looking for ways to save on taxes? Set up a 401(k) if your employer offers this benefit or open a traditional IRA. Both these account types allow you to invest your money before taxes, which lowers your taxable income. Just realize that you will have to pay taxes on the funds when you withdraw them in retirement.
“401(k)s and IRAs are a methodical approach that allows investments to grow tax-deferred,” Siomades said. “You can dollar-cost average (buy less when the market is up, and more when the market is lower), and it can all be taken out of your paycheck so you won’t be tempted to spend. Most importantly, take advantage of employer matching funds since most companies have this. It’s literally free money.”
If you think your income in retirement will be higher than your current income — or if you’re concerned tax rates will increase — you can invest in a Roth IRA. This type of retirement account allows you to invest your money after taxes so that you can withdraw it tax-free in retirement.
Don’t Forget the Stock Market
Once you set up your retirement account, there are many ways you can invest your money within them, including bonds, mutual funds, annuities, exchange-traded funds and more. These are all great options, but Tanous urges investors to include stocks in their retirement investment portfolio, too.
“History shows that the greatest wealth generator in American History is the U.S. stock market, where returns have been about 10% a year,” he said. “The problem is that these returns don’t come regularly and there are sometimes long periods of poor returns. But there are no 20-year periods in American history where people lost money in the market. The easiest way to make a fortune in stocks is to regularly invest in index funds and forget about it until it is time to retire.”
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