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A reader recently emailed me asking how much money should I save for retirement? While this question seems simple enough to answer, the truth is, it is actually hard to do. The reason is because I have no idea what retirement looks like to you. And chances are, you don’t either.
For most of us, we have this grand idea of retirement. We want to get to this magical place where we don’t have to wake up to an alarm clock and can sit around all day long. But in reality, that would get boring quickly.
In order to know how much money you should save, you need to get detailed with what your goal is. And this is true for retirement, buying a house, going on vacation, etc.
Think about it this way. When you want to go on vacation, you don’t just say “I’m going on vacation on Friday” and then when Friday comes, you get in your car and sit. You plan out ahead of time where you are going and have an idea of some of the things you want to see and do.
The same idea applies when saving money for other things too.
How Much Money Should I Save: Various Factors
Factor #1: What Are Your Goals?
You have to be able to answer the question of what are your goals if you want to know how much money to save for retirement. Again, this holds true for anything but in this post I’m focusing on retirement.
Do you want to travel a lot or play a lot of golf? Maybe you are more of a home-body and will read, paint and work on your garden.
So take some time to sit down and think. Write down what you think you want your retirement to look like. Then forget about it for a couple of weeks. After a few weeks, come back and review the list.
Do the things you wrote down still excite you? If so, great, you are on the right track. If they don’t, then you need to think about things some more. You may need to repeat this process a couple of times, so don’t get discouraged if you aren’t excited right away.
As the months and years pass, it is important to review this list. I recommend doing so once a year. The reason is because our dreams can change. Maybe right now playing a lot of golf in retirement sounds great. But in 5 years, you might enjoy something else and want to focus on that in retirement.
You need to keep your retirement goals updated so you can be certain you are on the right track and will have enough money to retire. After all, I hope it is obvious that someone who decides to travel will need a lot more money than someone who doesn’t travel.
If you decide you want to travel in retirement 5 years after you make your plan, you need to update your savings goals otherwise you won’t be able to afford to travel.
Factor #2: What Is Your Time Frame?
The time you have to save money also plays an important role in how much money you will need to save. If you have 30 years to save, you can potentially save less each month and allow time and compound interest to work in your favor. Conversely, if you have less time to save, you will need to save more.
As with our dreams changing above, so too can our time frame. Right now, we might think we want to retire at age 55. But in a couple years, we might have found a job we really enjoy and decide we don’t want to retire until 65.
Make sure you keep this part of your plan updated as well. It will have an impact on your savings rate throughout the years.
Putting It All Together
After you take into account your time frame and goals, you will have a better sense of how much money should you save to reach your goals. In a general sense, if you are looking to retire around age 65 and are relatively young – 30 years old or less – you should save around 15% of your income and easily reach your retirement savings goals. If you are older, you are looking at saving closer to 25% of your income in order to enjoy a fulfilling retirement, assuming you are just getting started.
Of course, if you want to retire early, meaning before 65, you are going to need to save a lot more money. I suggest a savings amount of close to 40%. While this seems high, because you will be cutting off your income earlier than most, and you will be living longer, you need more money than others.
Below is a chart for how much you should save each year depending on your age and when you want to retire.
If you can save these amounts, you will be well on your way to affording retirement. If you can save more money than recommended, great. This means you will have even more options when it comes to retirement.
If you can’t save this much, you need to make some changes so that you can. If you can’t save this much because you are in debt, you need to get out of debt. You can use this great app to help you create a payoff plan and keep you accountable.
From there, you need to find ways to save money. I wrote a post that highlights 51 ways you can save money. You should be able to use some ideas in there. As you cut your expenses, make sure you are saving the money and not spending it on something else.
Finally, for some of you, even after cutting some expenses, you still might not be able to save the target amounts. This is OK. Save as much as you can. The reason is simple. If you save nothing, you will have no money to retire on. This means you will have to work forever.
But if you save some money, any money, you have options. You might not be able to retire at 65 but you could retire at 72. You might not be able to afford to travel around the world, but you could afford to travel the country.
The point is, having some savings is 1,000 times better than having no savings. So even if you can’t save 15%, save what you can. Your future self will thank you.
If that amount you think you need to save is confusing in any way, you have an option to help clear things up. Use Personal Capital. Once you enter in your account balances, debt balances, and home value, they will show you your net worth. From there, you can check out their in-depth retirement planner and play around with the numbers to see if you are on track for saving enough money or if you need to save more. It’s completely and worth a look.
You cannot answer the question, how much money should I save, without knowing the time frame and goals you have in mind. While you might not want to do the little bit of work involved with answering these two questions, doing so will allow you to have the most comfort and greatest rate of success for saving enough money.
At the very least, start saving anything you can now. The sooner you start, the better off you will be. From there you can begin to answer the questions I presented above to get a better sense of how much you need to save overall.
[Photo Credit: Alexas_Fotos]