Everyone needs to save money for retirement. No matter how old you are right now, today is the day you should start saving. But how much should you save?
Grab a sheet of paper or a blank computer document and start tallying up your monthly expenses right now. Include everything from bills to groceries to entertainment. If you already have a household budget, you can skip this step.
Now look at your expenses and figure out which ones will increase, which ones will decrease, and which ones will disappear entirely once you retire. For example, if you commute to work your gas will cost much less. However, it’s likely that your medical bills will go up as you get older.
Compare the total monthly expenses between today’s budget and your future estimate. That equals the retirement ratio, or the percentage of income you’ll need to replace once you are no longer working. For many people, that number is around 80-85%, but yours might be different.
Where will your money come from when you retire? There’s Social Security—assuming that it still exists when you retire. You might also get a pension from your work or your spouse’s work, in some cases. After that, you’ll need to rely on your retirement savings, such as your 401(k) or a regular old savings account. You might also have money invested in stocks and bonds, although that’s not as common these days.
Other sources of passive income, such as the money from rental properties, is a great way to keep earning without actively working. Of course, that means you need to have the cash to invest in the properties to begin with. A few folks can expect royalties from creative works, such as books, to keep coming in after they retire. But more and more retirees have to work a part-time job or side hustle to stay afloat. If you don’t want to be one of them, save the max you can now!
The general guideline is to save 10-15% of your pre-tax income. That means if you make $40,000 a year, you should save $4000-$6000 a year, or $330-$500 a month. However, the younger you start saving, the less you’ll need to invest out of every paycheck. Makes sense, right? Ideally, you should have started saving for retirement during your very first job. But that advice doesn’t do you much good if you’re only starting to think about retirement when you’re 30 or 40.
Remember that retirement ratio? At a minimum, you should aim to save the inverse percentage from your paycheck. If your ratio is 85%, then you should save 15%. If your current employer matches funds, always contribute the max to your retirement account. That’s basically free money, so it’d be foolish to leave it on the table. Most employers match 3-6%, so the rest of your savings should be placed into a mixture of conservative investment accounts.
Although your individual needs will vary, most financial experts recommend $1.7-$2 million. How close are you?