One of the most common questions people ask when it comes to retirement savings is this one. How much do I need to save for retirement? While there’s no single answer, there are several key factors to consider. The best way to start is to think, save, retire with a strategic plan in place. The retirement lifestyle you desire and the income sources you have available will ultimately shape how much you need to save.
Though no magic number exists, there are some steps you can take to assess your situation how much you should save for retirement. Whenever possible, always think, save, retire with a financial planner’s guidance who can help you develop an effective investment strategy tailored to your needs, ensuring your financial well-being.
While tools like retirement calculators and expert recommendations are useful, it’s vital to consider your unique needs and goals. When determining how much to save, remember that the factors that affect your number are highly personal. As you think about the future, prioritize your plan to save effectively and ensure you can retire comfortably.
Factors Affecting Your “Think, Save, Retire” Strategy
When you see retirement calculator estimates, they often give you a number based on your current age, current annual income, and your retirement budget. What if you do not know, though, what your retirement looks like just yet or when you will retire? Consider the following factors that affect your retirement budget, as well as the amount of money you need to save for retirement planning success.
1. Retirement Age
When do you plan to retire? Your retirement age is a crucial factor in determining how much money you need to save. The sooner you hope to retire, the more money you need to place into your savings to cover your financial needs during retirement, no matter what your life expectancy is.
As you consider your retirement savings goals, consider the fact that if you are relying on Social Security benefits, you must reach full retirement age, which is generally 65 ½ years of age, to see your full Social Security benefit. If you retire earlier than that, the potential income from Social Security is not available at the full value. You will need to compensate for that in another way.
2. Desired Lifestyle
Another key factor in determining what your total savings need to be heading into retirement is what you will need during retirement. That’s based on the type of lifestyle you plan to live. To retire comfortably at the age of 65 and travel, you will need more money and a higher savings goal than if you plan to work until 65 and then retire and stay home most of the time.
The financial decisions you make must take into consideration the way you wish to live. That way, you have sufficient savings put aside to meet your expectations and can spend money to live the lifestyle you want, whether you’re spoiling the grandkids or traveling the world.
3. Life Expectancy
How long will you live? The U.S. Centers for Disease Control and Prevention notes that life expectancy for men is 74.8 years, and for women, it’s 80.2 years of age. As you consider how much to put into your retirement accounts, you certainly need to plan for your future life expectancy.
Assume that you live longer than these averages, though. That way, you have enough retirement savings to account for all of your potential needs. Also, note that your current retirement savings must extend enough to cover inflationary costs that are likely to rise. That means if you have $1 million in the bank today, it will not be worth $1 million in terms of how far it goes in 20 years.
4. Current Savings
Beyond your retirement age and when you expect to retire, consider what steps you are taking right now to plan for it. Your current retirement savings makes a big difference thanks to compound interest. Depending on the type of retirement investment strategy you use, chances are that you will have accounts that build interest on top of the interest they have already earned. The more you put your pre-retirement income into these accounts now, the more time there is for it to build. That means you’ll need to funnel less into it to reach your goals.
5. Income and Expenses
Saving for retirement also means looking at your current spending and saving habits. Consider the following specific factors as you work to build your retirement account:
- How much of your pre-retirement salary is going towards paying off debt? Most people want to enter retirement with no debt.
- Are you maximizing employer contributions?
- Do you have a plan in place to get tax advice to lower your overall costs?
If you retire with significant amounts of debt or you are spending more than you are making on a routine basis, then you may need to reassess to ensure you are putting enough money aside. What factors do you need to meet – such as being debt-free – to make your retirement plan work?
The best way to learn what you really need to save is to work with a professional financial planner or advisor. Get matched with a financial advisor now and start working on building a retirement plan that fits your needs.
Saving Goals by Age
For some people, having a monetary figure to work towards makes sense. If that’s you, consider these often recommended savings objectives and goals with pre-tax income:
- By the age of 30, have 1x your salary saved for retirement.
- By the age of 40, have 3x your salary saved for retirement.
- By the age of 50, have 6x your salary saved for retirement.
- By the age of 60, have 8x your salary saved for retirement.
At this savings rate, you should generate enough income to pay for the type of lifestyle you desire (and one that you are already accustomed to). Following these goals helps you think, save, retire with confidence.
Strategies to Reach Your Retirement Savings Goal
Now that you have some insight into a dollar amount that is considered ideal, you may need a bit of help knowing what specific steps to take to reach these objectives. To get better clarity into what you need to retire, it’s a good idea to see legal or tax advice (and remember, past performance is not always a reliable indication of future performance).
1. Maximizing Employer-Sponsored Plans
Even if you are counting on receiving full Social Security benefits, it is not likely that this will be enough to meet your financial needs during retirement. That is why you should use any available tax-advantaged retirement account, including the use of employer-sponsored plans.
The tax implications both now, during your working years, and later when you retire are too good to pass up on, and they can help you better meet your retirement goals. There are a few key aspects to remember here:
- Use your employer match: Your employer match is added money to your retirement planning that your employer is already counting on paying. If you do not do this, you are certainly missing out.
- Find out how you can increase your company match: There are some companies that offer incentives to those who wish to increase their retirement, or they may allow those who are promoted to receive a higher match.
- Work with an advisor to get investment advice on the right type of assets to keep in these accounts to maximize your investment returns.
2. Individual Retirement Accounts (IRAs)
If you do not have access to an employer-sponsored retirement plan or there are other factors at play and you do not want to use it, an individual retirement account (IRA) can be an excellent option. It also provides you with benefits, and depending on the type you obtain (a traditional IRA or a Roth IRA), you may see significant savings on taxes. If you plan to use an IRA, there are a few things to remember:
- Work with a licensed professional or brokerage services to help you with asset allocation and balancing risk tolerance. You want to be sure you are making the best decisions.
- Consider your risk tolerance carefully, especially as you get older and may not have a lot of time before retirement to get more money saved if the market crashes.
- Make sure you make catch-up contributions, which are available to those who are over the age of 50 and allow you to put more into your account to build your retirement savings.
3. Investing for Growth
Investing your pre-retirement income wisely allows you to control who and what you support while also building your personal finance goals. That is, with growth-focused investing, you are able to create new strategies to build the value of your assets over time.
Depending on the type of growth investments you decide to invest in, you may be able to create additional retirement income streams from dividends or stocks that pay you. You may also be able to tap into a higher savings rate if you are investing more of your annual salary into your retirement needs.
4. Portfolio Management
No matter what hypothetical example you find online or which calculators you use out there, there is nothing more important and valuable to your financial well-being than hiring a professional to guide you. Portfolio management should include:
- Choosing the best possible type of investment strategies for your specific financial goals
- Managing pre-tax investing, reducing overall costs for investing, and maximizing your savings rate, all of which can be done by a licensed professional
- You also want to consider how your rep can help you with developing numerous income sources to diversify your investments over time.
If you have not done so yet, it is time to use our free advisor match tool to find an advisor who can help you get the type of savings rate you want and need to build financial wealth and success during your retirement years.
5. Adjusting for Inflation
Rising costs make it hard to know how much money you will need in the future to continue to see rising costs. To adjust for inflation, consider these strategies:
- Work with an investment professional who can help you anticipate inflationary risks.
- Diversify your income sources so that some of your retirement investments are not specifically tied to just investments that have a strong inflationary impact.
- Review your budget and make adjustments to savings goals as you do.
Why Use a Financial Advisor to Hit Your Retirement Goals?
Your pre-retirement annual income is critical to building your retirement savings over time. Yet, even if you put more savings aside and continue to live frugally, chances are good you will not reach your full potential until you speak to a final advisor.Your financial advisor can provide you with clear action steps to take to build a strong financial future. As you ask how much you need to save for retirement, it may be time to consider not just more savings but how to maximize your outcome. For that, turn to a financial advisor you can trust. Find a financial advisor you can rely on now.
