You likely know the importance of saving for retirement, but the process itself can feel overwhelming. Understanding how to save for retirement is an essential aspect of your long term financial plan. While there are plenty of strategies and rules of thumb for being a smart saver, more often than not it’s about identifying a saving habit you can stick to and get the most of compound interest. The earlier you save, the more compounding can work in growing your nest egg over time.
When Should I Start Saving for Retirement?
The best time to start saving is once you have earned enough to pay for your expenses and have some extra money left over every month. Learning how to save for retirement will make sure you have enough to live off comfortably during retirement. A 2019 Northwestern Mutual study showed that people think there is a 45% chance they will outlive their savings, and 41% have taken no steps to address it.
Your life varies considerably as you grow older, as does your income, spending, and saving potential. Getting a raise, buying a house, starting a family, your kids going off to college, big life changes that can affect your saving capacity. Retirement planning means you can have a strategy in place when these changes happen, so your saving habit can continue without you thinking much about it.
How Much Should I Save for Retirement?
How much to save for retirement depends on how you want to live your retirement. These may include starting a business, volunteering, traveling, going back to school, relaxation, and spending time with your family. Common thinking is that you should aim to spend around 80% of what you did pre-retirement. Later in this series we will explore the exact retirement income you should aim to achieve through saving and investment growth.
How To: Find Your Sweet Spot
There are a few “rules of thumb” out there for those interested in saving. You might opt for the 50/20/30 system, the 80/20 plan, or Fidelity’s 50/15/5 rule. What’s with the numbers?
- The 50/30/20 system works by spending 50% on needs/essentials, 30% on wants, and 20% on savings and debt, ensuring a balance in your spending.
- The 80/20 plan advocates for putting 20% of your income towards savings and spending 80% on everything else.
- The 50/15/5 rule allocates 50% towards essential expenses, 15% of pretax income towards retirement savings, and 5% towards short-term savings for emergencies.
Finding something that works for your unique situation is key when learning how to save for retirement. This strategy must be sustainable, a habit you can stick to long-term. Former New York Times Business Reporter Charles Duhigg, says that habits are an effort-saving instinct. To know what works best to ramp down your mind, you must identify what type of saver you are.
What Kind Of Saver Are You?
Creating a habit is not just about watching your spending or keeping an eye on an app. It’s about understanding how your personality affects the way you spend, save, and plan. It is a journey of financial self-discovery. Retirement planning requires an understanding of why and how you are making these financial decisions. By knowing your saving habits you can adapt your strategy.
You want to save but never do. You want to wait for when the time is right. Which is now! Hiring a financial advisor can help you set a strategy and keep you on track to avoid self-sabotage.
You might not know the most efficient ways of savings, but you are taking steps early. You might not have a solid strategy but are doing your best to learn. You know what they say: the early bird catches the worm. If knowing is half the battle, the other half is doing. So get started on developing a strategy and game plan for saving. Your consistency will pay off!
You might have started a little later but you are keeping up with a savings plan. You know what you want and have your eyes set on something bigger, like a 401k. You are doing great, the way forward will be a smooth journey.
You are at the prime of your career but haven’t prioritized saving yet. You should start getting serious about how much you should be saving for retirement. Figure out how much you can save, set up an automatic payment, and stick with it.
You are working towards your golden years and making sure you have a comfortable nest egg. You will sacrifice anything to get there. It is important to evaluate your strategy to make sure there’s a balance between your goals and your current lifestyle.
You prioritize your savings so much, you can end up falling short on money for expenses. This starts a cycle in which you then have to take money out of savings and/or use credit cards to cover your monthly expenses, which generates debt you then don’t pay off. Focus on a realistic balance between how much you are spending and how much you can save.
Save Smarter – Regardless of How You Save
Saving is about not having to think when deciding between saving and spending. It is about making it an automatic habit. The easiest way to do so is to set up an automatic payment to your savings account as soon as your income comes through. You “pay yourself first”. You are mentally prioritizing saving for retirement, which is empowering. The amount will depend on your specific situation. And on what type of saver you are, of course.
How Much Should You Save For Retirement?
More than half of Americans don’t know how much they’ll need to retire comfortably. So how much should you save for retirement? It depends on a variety of factors:
- What kind of lifestyle do you want to have when you retire?
- What are your projected everyday living expenses?
- Do you have resources that can cover unplanned expenses, like health insurance?
- Will you still have a mortgage?
Whatever your situation, go big with the number. Particularly with rising and unpredictable healthcare costs – often underestimated by retirees, it is better to leave behind some generational wealth or to make a charitable donation than outlive your savings. So start saving, as much as you reasonably can. Doing so early can hel it become second nature. Get a financial planner on board to ensure you’re traveling the road to retirement with an expert navigator
The Most Effective Ways to Save: Retirement Savings Accounts
Start exploring the most effective ways to save. Are you contributing to a traditional retirement savings account such as a 401k or an IRA? You should know how much you can automatically put towards retirement and aim to max out contributions.
Many variables go into optimizing your retirement. You should be particularly careful with your account fees. Learn more about the most common retirement savings options here.
How To: Take Advantage of the Magic of Compounding
Imagine you are 22. If you make a single contribution of $5,000 to your IRA, it can grow more than $170,000 in 45 years. Now make a habit of that contribution, and make it every year for 45 years. If you leave your funds to earn an average 6% return, your retirement savings would grow over $1 million. This is not considering increases in contributions. It is the same amount over the years.
Beware of Lifestyle Creep
Lifestyle creep is when your expenses ‘creep up’ as your income increases. This could reduce your savings potential. Having a strategy to budget properly and save will make sure you can save for retirement. The idea is to increase your savings as your income increases, and you adjust your budget.
The Key to Saving for Retirement
To succeed in this stage of retirement planning is all about managing your behavior to facilitate saving. Making lifestyle choices that let you direct cash flow to savings instead of spending it. Start now by understanding why it is important to save and invest for retirement. Hiring a financial advisor can help create a comprehensive retirement plan by focusing on your unique saving One that reflects changing conditions and creates opportunities to invest.
In this series, we’ll dive deeper into each of these phases and how they relate to your unique retirement planning journey. To identify which phase suits you best at this point in your life, as well as to learn actionable frameworks and strategies, download your free copy of our latest cost-free guide, The Road to Retirement.
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Real financial planning should pay off today, and in 10 years' time.