You know saving for your retirement is important – throughout your working life, you will want to ensure you are consistently contributing to your retirement fund to prepare yourself for a comfortable retirement period. But the question is, how much should you save?
The answer to this question differs for everyone. There are plenty of details that factor into this – how much money you plan to make throughout your career, when you are planning to retire, and whether or not you want to work part-time during your retirement are just a few things to consider when deciding how much you should save.
Establishing Your Savings
To begin saving for retirement, you will have to open an Individual Retirement Account (IRA), 401(k), or another type of retirement plan. Once you begin working, you are eligible to open these plans and begin your contributions.
You can choose to make your personal retirement contributions through a plan arranged by your employer. This is typically where you have the opportunity to start a 401(k) plan. As a general rule of thumb, many banks and credit unions recommend contributing 15% of your annual income pre-tax. Though this seems like a significant amount at first glance, it’s important to note this estimation includes any contributions your employer makes on your behalf through your retirement plan.
Typically, employers will either match your personal contributions or at least contribute a percentage. This means that as you as consistently investing in your retirement fund, your employer is doing the same. Through a 401(k), you are allowed to contribute up to a certain amount each year, depending on your income and age.
Understanding this rule, you’ll want to take into consideration when you plan on beginning your retirement contributions, and when you plan on retiring. Each year you put off investing in your retirement fund, the higher percentage of your income you will want to contribute going forward. Alternatively, the earlier you begin contributing to your retirement fund, you can comfortably contribute less of your yearly income.
Your Retirement Timeline & Social Security
Deciding how much you want to contribute to your retirement will heavily depend on when you are planning to retire. Most people choose to retire after they reach the age where they qualify for Social Security benefits. As a working individual, you contribute to Social Security through your taxable earnings. Your contributions are deducted from your paychecks before you receive them. As you are contributing to Social Security throughout your life, understand these funds aren’t being set aside in a personal account for you, like an IRA or 401(k). Instead, your Social Security taxes pay for currently retired individuals, disabled people, and survivors of workers who have died.
As you reach retirement, you will receive Social Security benefits through people’s tax payments to Social Security. Your personal Social Security benefit amount is based on your income earnings throughout your life, and how long you worked.
You are able to access your Social Security benefits starting at age 62. Should you decide to receive your benefits at 62 years old, you will be eligible for reduced retirement benefits until you reach your full retirement age. Established by the Social Security Administration, your specific full retirement age depends on when you were born but ranges from 66 to 67 years old. Once you’ve reached full retirement age, you are eligible for your full benefit amount. To further increase your Social Security benefit amount, you can delay receiving benefits until you are 70 years old. Past 70, you do not receive any incentive to delay your benefits.
Maximizing Your Retirement Contributions
You can continue to maximize your retirement funds by opening more than one retirement plan. For example, if you open a 401(k) or contribute to a pension through your employer, you can also open up a type of IRA to contribute additional funds. There are multiple options for additional retirement contributions, but the most common are traditional IRAs and Roth IRAs.
You can open an IRA long before you open a 401(k) – this is especially helpful for minors, or individuals who work at jobs where their employers do not offer a 401(k) plan. Through an IRA, you can contribute up to a certain amount each year, depending on your age. If you choose to open both a 401(k) and an IRA, it is recommended to maximize your contributions to your IRA first, because of the flexibility of your investments. Through an IRA, you are eligible to invest in mutual funds, individual stocks and bonds, and exchange-traded funds. With a 401(k), you can expect to be limited in your investment choices by the employer that provides the retirement plan.
What Makes Sense For Your Retirement Plan
Understanding the different ways you can contribute to your retirement fund can give you a good summary of how much you can expect to save over time. Once you’ve determined the accounts, frequency, and amount you are comfortable contributing on a regular basis, you can begin to picture what your retirement will look like. After working out your expected retirement savings, you’ll have an idea of when in your life you will be able to retire, and how much money you can expect to have during your retirement period. From here, you can adjust your contribution plans to meet your ideal retirement plan.
Remember there is never a bad time to begin contributing to your retirement fund, and every contribution counts. To decide when you should start saving up for your retirement, determine what plans make the most sense for your income and financial obligations. Having a plan early on will set you up for future success.
