How To: Save For Retirement
“How to save for retirement?” is one of the most common questions people have when it comes to planning for their future. The earlier you start saving, the better.
You likely know the importance of saving for retirement, but the process itself can feel overwhelming. Knowing 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 smart saving, more often than not it’s about developing a saving habit that works for you—and taking advantage of compound interest. The earlier you start, the more your nest egg can grow over time.
When Should I Start Saving for Retirement?
A good time to start saving is as soon as you are earning enough to cover your expenses and have some extra money left over each month. Developing a consistent retirement savings plan will help ensure you have enough to live comfortably in retirement. According to a study by 2019 Northwestern Mutual, 45% of people fear they will outlive their savings, and 41% have taken no steps to address that concern.
Your life varies considerably as you grow older, as does your income, spending, and saving potential. Whether you receive a raise, buy a home, start a family, or face other major life events like your children going off to college, these changes will impact your saving ability. Retirement planning helps ensure that, despite these shifts, you can maintain a savings habit that continues to grow your nest egg.
How Much Should I Save for Retirement?
The amount you should save for retirement depends on the lifestyle you envision during your retirement years. Do you plan to start a business, travel, volunteer, go back to school, or simply relax and spend time with family? While the specific figure varies, a common rule of thumb is that you will need approximately 80% of your pre-retirement income to maintain your lifestyle in retirement.
Finding Your “Sweet Spot”
There are several “rules of thumb” that can help guide your saving efforts. You may come across the 50/30/20 system, the 80/20 plan, or Fidelity’s 50/15/5 rule. What do these numbers mean?
- The 50/30/20 System: This system suggests allocating 50% of your income to essential needs (like housing and utilities), 30% to discretionary spending (wants), and 20% to savings and debt repayment. This framework helps ensure balance in your budget.
- The 80/20 Plan: In this approach, you allocate 20% of your income toward savings and spend the remaining 80% on everything else.
- The 50/15/5 Rule: This system advises putting 50% of your income toward essential expenses, 15% of your pre-tax income toward retirement savings, and 5% toward short-term savings for emergencies.
The key is to find a savings strategy that works for your unique financial situation. Your plan must be sustainable—a habit you can stick with in the long term. Charles Duhigg, former New York Times business reporter, writes that habits are an “effort-saving instinct.” Understanding your saving habits will help you find the best approach for your financial goals.
What Kind Of Saver Are You?
Building a saving habit isn’t just about tracking your spending or monitoring 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 a clear understanding of the decisions you make with money, as well as the motivations behind those decisions. By understanding your saving tendencies, you can tailor your retirement strategy to suit your individual goals and circumstances.
Here are some common types of savers, along with tips for each:
The Procrastinator
You want to save, but you just never seem to get around to it. You keep telling yourself that you’ll start when the time is right—only that time never seems to come. The truth is, the time to start saving is now. Hiring a financial advisor can help you develop a strategy and stay on track, keeping you accountable and preventing self-sabotage.
You might not yet know the most efficient ways to save, but you’re taking action early. While your strategy might not be fully solidified, you’re making the effort to learn and improve. You’ve heard the saying, the early bird catches the worm, and you’re living by it. If knowledge is half the battle, action is the other half. Now is the time to commit to developing a game plan for your savings. Your consistency will pay off in the long run.
You may have started saving a bit later, but you’re keeping up with a solid plan. You know what you want and have set your sights on bigger goals—like contributing to a 401(k). You’re on the right track, and as long as you stay the course, the journey ahead will be smooth.
You’re in the prime of your career but haven’t prioritized saving for retirement until now. It’s time to get serious about your retirement savings. Take a close look at how much you can realistically save, set up automatic contributions, and stick with it. It’s never too late to start, but the earlier you begin, the better.
You’re focused on building a comfortable nest egg for your golden years, and you’re willing to make sacrifices to get there. However, it’s important to periodically evaluate your strategy to ensure there’s a healthy balance between your long-term goals and your current lifestyle. Are you saving enough? Or are you sacrificing too much and missing out on enjoying the present? Find the balance that works for you.
You’re so focused on saving that you sometimes sacrifice your day-to-day financial needs. This can lead to a cycle where you dip into your savings—or even use credit cards—to cover monthly expenses, ultimately creating debt that becomes harder to manage. It’s crucial to strike a balance between saving enough for the future and maintaining a comfortable financial life today. Focus on setting realistic savings goals that allow for both future growth and current financial stability.
Saving Consistently—Making It Automatic
Saving isn’t just about choosing between spending and saving—it’s about making saving an automatic habit. The easiest way to do this is by setting up an automatic transfer to your savings account as soon as your income comes in. In other words, you “pay yourself first.” This strategy mentally prioritizes saving for retirement, which is empowering. The exact amount you save will depend on your personal situation and, of course, on what type of saver you are.
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 be saving? The answer depends on several factors:
- What kind of lifestyle do you want to have in retirement?
- What are your projected everyday living expenses?
- Do you have resources to cover unplanned costs, such as health insurance?
- Will you still have a mortgage in retirement?
Regardless of your situation, it’s wise to aim high with your retirement savings goal. With rising and unpredictable healthcare costs—often underestimated by retirees—it’s better to err on the side of caution. So, start saving as much as you reasonably can. The earlier you begin, the easier it will become to make saving a habit.
Ways to Save: Retirement Savings Accounts
To get the most out of your retirement savings, start by contributing to the most effective retirement accounts available to you, such as a 401(k) or an IRA. Determine how much you can contribute automatically each month, and aim to max out your contributions.
Keep in mind that there are many factors to consider when optimizing your retirement savings. One of the most important is minimizing fees associated with your retirement accounts. Make sure to learn about the fees that come with different accounts and how they can impact your savings in the long run.
How To: Take Advantage of the Magic of Compounding
Imagine you’re 22 years old. If you make a one-time contribution of $5,000 to your IRA, that money could grow to more than $170,000 over 45 years. Now, if you make that same $5,000 contribution every year for 45 years and your investment earns an average 6% return, your retirement savings could grow to over $1 million. This example assumes a consistent contribution amount without increasing it over time. The longer you save, the more powerful compounding becomes, turning small, consistent contributions into a substantial nest egg.
Beware of Lifestyle Creep
Lifestyle creep happens when your expenses increase as your income rises. While it’s natural to want to upgrade your lifestyle, allowing your spending to grow faster than your savings can diminish your ability to put money aside for retirement. A way to avoid lifestyle creep is budgeting strategically and increasing your savings as your income grows. By keeping your expenses in check and prioritizing saving, you can make the most of any pay raises or bonuses.
Wrap-Up: Saving for Retirement
Success in retirement planning is all about managing your behavior to facilitate saving. It requires making intentional lifestyle choices that direct your cash flow toward savings, rather than spending it. Start by understanding the importance of saving and investing for retirement.
Disclosure: This material provided by Zoe Financial is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Nothing in these materials is intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Zoe Financial is not an accounting firm – clients and prospective clients should consult with their tax professional regarding their specific tax situation. Opinions expressed by Zoe Financial are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Zoe Financial, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Zoe Financial does not provide legal advice.