How much money you should have saved by your age and how to get there
Disclaimer: This post is sponsored by PSECU, a Pennsylvania-based credit union.
Far too many Americans save far less for retirement than they should. As a result, a large number of seniors lack the financial resources they require to fully enjoy their golden years in comfort. Social Security only helps so far, and many retirement-aged individuals end up working longer than they planned or taking on a part-time job when they should be spending time with their grandchildren.
One of the reasons people save far less than they should in their retirement kitty stems from ignorance about how much they truly need to enjoy their sunset years in comfort.
Knowing how much to save through various life stages helps prevent people from spending their retirement in poverty. These guidelines also help people of all ages track where they should be, so they can take advantage of every opportunity to catch up and pad their retirement funds.
Determining How Much You Need
How much someone needs to retire comfortably depends, in part, upon how much income they earn during their working years. Nobody wants to drastically reduce their lifestyle just because they leave the workforce after a long career. Also, advances in modern medicine have increased life expectancy considerably, meaning one's retirement dollars need to last significantly longer than in past generations.
Most financial planners advise their clients they will need to save approximately enough to replace 80 percent of their pre-retirement salary. Those with a working salary of $50,000 per year should plan on needing roughly $40,000 per year to retire comfortably.
Social Security will only make up approximately $14,400 per year, which is why they should have enough in an IRA or another retirement vehicle to provide about $25,600 for each year of retirement.
Other factors may impact the amount an individual needs to save. Those who pay off their mortgages before retirement can confidently deduct the annual cost of housing from their retirement budget. Likewise, selling a larger family home and downsizing can cut housing costs for those retirees still making mortgage payments.
Starting Early Helps
The earlier an individual begins saving for retirement, the better. The same $10,000 invested 30 years before retirement age arrives will net far more in interest than if it were invested five years before hanging up one's apron. If someone invests $100,000 by age 30, they will amass well more than a million dollars by the time they reach age 65.
But what options are available to the millions of Americans age 40 or older who have nothing saved away? Though the situation may seem dire, they should start saving as much as possible. Those aged 50 or older can take advantage of the additional catch-up contributions allowed per IRS rules.
Many modern parents start opening investment accounts for their children while they are still young.
Doing so serves two purposes:
- It allows more time for interest to compound, and
- It also helps parents educate their children about financial literacy.
Young adults should balance saving for retirement with their other expenses such as student loan debt.
Also, all adults need to develop an emergency fund to draw upon in the case of unfortunate life events such as the loss of a job, expensive car repairs or an unexpected illness. Putting away at least six months' worth of salary for emergencies remains a good rule of thumb to follow.
Furthermore, young adults may need additional funds to buy a home.
Savvy savers strike a balance between paying down debt and creating an emergency fund while also saving for retirement. After all, if an unplanned expense occurs, using credit to cover the cost of that car repair or medical bill results in costly interest and finance charges, whereas it costs nothing additional merely to cover the unforeseen expense.
Family Fortune Formulas
In addition to the 80 percent rule described in section one, financial planners use formulas both in helping their clients save for retirement and in budgeting for unanticipated expenses.
Two of these additional methods use a multiple of people's annual salary to determine how much they should save by certain ages in their lives.
When examining these formulas, remember they are guidelines, not a justification for throwing up one's hands and resigning oneself to a retirement spent welcoming shoppers to Walmart.
One such formula starts at age 35 and increases of multiples of a person's average salary by one point for every five years.
For example, by age 35, individuals should have two times their average salary saved, three times by age 40, four times by age 45, all the way up to eight times the individual's annual salary by age 65. The simplicity of this formula makes it attractive to many who primarily rely upon themselves and not an investment adviser when planning for retirement.
Another formula from the financial gurus at Fidelity makes for a slightly more attainable set of savings goals ideal for those who started saving a little bit later in life.
Individuals should strive to have twice their annual salary saved by age 40.
This percentage increases by two points for every decade, instead of one every five years. According to this formula, individuals should accumulate four times their annual salary by age 50, six times by age 60 and eight times by age 67, assuming that is when they will retire.
Expecting the Unexpected
Far too many Americans have no emergency fund to draw upon in the case of an unexpected expense. Only 39 percent of Americans reported having sufficient savings to cover a $1,000 expense.
There are many reasons many Americans lack sufficient savings. Some of these factors people can control — such as the age they start to save money — while others, such as stagnant wages paired with skyrocketing housing and educational costs, remain beyond any one person's control.
Regardless, financially savvy individuals recognize that while relying on credit increases a person's cost-leveraging ability — few people could afford to buy a home if they had to finance it entirely in cash — over-reliance on credit costs Americans billions annually in interest and finance charges.
For example, say an individual needs a new clutch in their vehicle.
They finance $1,000 worth of repair costs using a credit card with a relatively low 12 percent interest rate. Paying only the minimum payment over three years will cost nearly an additional $200 in interest. As many Americans carry between $14,000 and $18,000 in credit card debt, those interest charges add up quickly, and those with the worst credit end up paying the most, adding to the cycle of poverty.
Are We There Yet?
No matter how wisely an individual invests their money and dedicates a portion of every paycheck to their retirement fund, life events are inevitable.
Divorce, serious illness, corporate downsizing, and natural disasters can easily diminish retirement savings or even cause them to disappear altogether.
What can a person do when an unanticipated hospital stay keeps them out of the workforce, for example, while eating away at their savings?
Rebuilding savings after economic catastrophe requires more aggressive investing than an individual may feel comfortable with, although even those rapidly approaching retirement with a shrunken kitty should avoid putting all of their retirement eggs in one risky investment as a bit of a "Hail Mary."
Those who have experienced financial devastation need to deal with not only their lost funds, but with coping psychologically with the loss. Even for smart investors, seeking the advice of a qualified financial planner to develop an aggressive — yet at least somewhat safe — retirement savings strategy helps people think about how to rebuild logically, not emotionally.
Keep in mind that while rebuilding retirement savings may require sacrifice, it's far from impossible to do. Individuals who have suffered a severe financial setback may need to trade in their morning Starbucks for coffee brewed at home, but they need not worry about retiring with nothing saved.
Many wise investors only consider investment vehicles as ways to build retirement wealth, but thinking outside the stocks, bonds and mutual funds box can rebuild savings.
Other ideas to restore wealth include selling unnecessary items on eBay, renting out spare bedrooms via Airbnb, taking on a roommate or using a hobby such as sewing to create crafts to sell for additional cash.
Wealth in the Golden Years
Current economic conditions place extra strain on those trying to save for retirement. However, by investing early and wisely, as well as practicing smart recovery following economic setbacks, tomorrow's retirees can still look forward to spending their golden years in style. Start 2019 right by creating or revising a retirement savings strategy that works.