Retirement might be a long way off, but that means it’s actually the perfect time to start saving. How much money do you actually need to retire?
How to Calculate Your Retirement Fund
Many experts say you need 65% to 80% of your current income level available for every year of retirement. In other words, if you earn $50,000 a year as a working adult, you should have $32,500 to $40,000 to spend each year you’re retired.
Another school of thought is that you should have eight to 10 times your annual income available in retirement. That means if you earn $50,000 annually, you should have $400,000 to $500,000 saved up by the time you retire.
That works out to roughly the same amount as the previous calculation. If you save $500,000 for retirement — and your retirement lasts 10 years — you’ll have $50,000 to spend per year.
However, the average length of retirement can vary a lot depending on your health, gender, age of retirement and where you live. The average French woman spends 26.9 years in retirement, while a South Korean man averages just 13 years.
The younger you want to retire, the more money you should plan to save. You should also save more if you think you’ll live a long time — which you can estimate using a life expectancy calculator — and if you plan to rent a home or pay off a mortgage in your golden years. Retirement calculators can help you plan how much to save.
Tips for Saving for Retirement
It’s common to have a low net worth in your twenties because you’re likely attending college, paying off student loans or just getting started in your career — or all three. However, it’s also important to start thinking about retirement at this age. The earlier you start saving, the more your savings will compound over time.
1. Choose the Right Retirement Plan
How much you can save for retirement depends on where you work. For example, workers at employee stock ownership plan (ESOP) companies have retirement accounts 150% larger than at companies that don’t provide this benefit.
If you work for a traditional employer, you might have a 401(k) account. In this type of plan, you’ll contribute a significant amount of your own money to the account, and your employer will also add a portion of their money to it. In some cases, they may even match your contributions, meaning however much you put into the account, the company will put in the same amount.
However, if you’re self-employed — such as being a gig worker, freelancer or contractor — you won’t have access to an employer-provided 401(k). In that case, you can open an individual retirement account (IRA) to start growing your retirement savings.
Why not put your funds into a basic savings account? With a retirement account, your money should grow significantly over time because you can invest it. With most savings accounts, your money effectively just sits there — because you can’t invest it in stocks or mutual funds, it doesn’t grow much over time. Even high-yield savings accounts average just 3% returns.
It’s crucial to grow your savings because of inflation. By the time you retire, that $10,000 in your savings account will still be around $10,000, and it won’t be worth nearly as much as it did in 2023. In contrast, if you keep the money in a Roth IRA account and invest it over the years, it could grow to $109,575 within 40 years without any additional deposits.
2. Hold Steady
It can be tempting to increase your spending as you start earning more money. But if you always match your level of spending to your income level, you’ll have little left over to save. So, if you get a raise, put the extra earnings into your retirement account rather than signing up for another subscription service.
3. Save 10% to 15% Each Year
In your twenties, experts recommend setting aside 10% to 15% of your pre-tax income for retirement. High earners should aim for the 15% range while low earners can settle for 10%, because Social Security may replace more of your income when you retire.
If you start saving for retirement at 30, you’ll need to save around 18% of your annual income. If you wait until 35 to start saving, you must set aside 23% of your annual income to catch up. In other words, the sooner you start saving, the less money you have to set aside every year. That’s because your savings earn interest and grow over time.
4. Simplify the Process
One way to simplify saving is to make it automatic. Set up electronic transfers so part of your monthly income automatically goes into your retirement account. If you don’t see the money, you’ll be less tempted to spend it.
5. Eliminate Debt
It’s crucial to eliminate debt before retirement so you can put your savings to good use. Try to eliminate student loans, mortgages and credit card debt while you’re young so they don’t compound over time.
Preparing for Retirement
It’s not always fun to think about, but your current choices will greatly affect the type of lifestyle you lead in your sixties and beyond. Open an independent or employer-provided retirement account as soon as possible and start contributing to it. The earlier you start saving, the more comfortably you can live when you’re older.
