Depending on how old you are, you may think about retirement daily, or perhaps, you’ve never thought about it all. However, it is never too early to start saving for retirement, and ideally, you should start saving in your 20s (if not before). Currently, 80 percent of people between the ages of 30 and 54 believe they will not have enough money put away for retirement, and that is a scary number.
Unless you have been saving for a while, once you approach your goal retirement age, you will find yourself in financial trouble. How much you need to save in order to maintain your current lifestyle (or close to it) will depend on your own personal needs, but there are several important issues you should consider in order to determine how much you should be saving.
1. Determine the age at which you want to retire
You can begin receiving Social Security benefits at 62, but that doesn’t necessarily mean you should start those benefits. Your benefits are reduced a fraction of a percent for each month before your full retirement age (which depends on when you were born). If you start your benefits early, you will receive benefits for a longer amount of time, but your benefit amount will be smaller.
You will need to factor in Social Security when deciding the age at which you plan to retire and how much to save in order to retire at that time. If you want to retire early, you will need to save more each year, so having a goal retirement year in mind is helpful. If you love your job or simply want to retire later in order to save more, then you can factor that into your anticipated retirement age, as well.
2. Determine how much money you will need for retirement
Although many experts claim that you need about 80 percent of your pre-retirement income per year in order to retire, that number (or any other, for that matter) isn’t a golden ticket to a happy or financially stable retirement. However, it makes sense to plan for a large enough retirement income to continue to live a life similar to the one you have now.
MSN Money has an excellent retirement calculator that can help you understand what you might need. According to Investopedia, if you anticipate needing $50,000 per year of retirement, you will need to save $833,333, and you will need to save $4,166,667 in order to have $250,000 per year. So obviously, the amount you need to save will depend on your own needs, and the amount you need to save per month will depend on your current age and the amount you have saved already.
3. Determine if you plan to stop working completely after retirement
Currently, 75 percent of Americans believe they will work through retirement, and 32 percent of those Americans say they will keep working because it will be financially necessary. While it may be difficult to know for sure if you will continue working after you retire from your full-time job, you can consider this when making savings goals.
Although 75 percent of people polled by Bankrate said they planned to work after retirement, only 15 percent of people retired today actually do this. Times are definitely changing, but it is smart to budget conservatively when including post-retirement work when calculating your necessary savings; circumstances could always change and prevent you from working after you retire.
4. Determine if your financial priorities are right
Depending on which bill you are paying, it can be smart to pay off debt before you save for retirement. In 2013, U.S. households held an average credit card debt of $15,270. (This is due to extremely indebted households. The average household owes just over $7,000.) Because credit cards hover right around a 14-15 annual percent rate, it makes sense to make it a priority to pay off heavy credit card debt.
However, if you only use your credit card once in a while or you are managing to keep your debt low, you should probably focus on retirement. And if you have debts with low interest rates, such as student loans or some car loans, you also should prioritize your retirement. One exception might be if you are trying to build up your credit to purchase a home, in which case you might want to pay off some debt. Still, if you are getting older and you haven’t saved enough for retirement, perhaps you shouldn’t be buying a house.
5. Determine the details
When calculating necessary retirement funds, many people also anticipate their life expectancy. As of 2010, the life expectancy in the United States is 78.8 years. Your retirement needs will depend on how long you live. None of us can know for sure when our time will come, but you can make an educated guess based on how long your deceased relatives lived, how well you eat, and how much you exercise, as well as other factors.
When planning for retirement, if applicable, you can also consider your spouse’s finances. If you are planning for a long and happy life together after retirement, you will need to save enough for both of you to be comfortable. You also might want to consider how stable your job and your spouse’s job, will be over the years before you retire. Most of us cannot guarantee our job security, but those of us who are concerned about the longevity of our position may want to save more. One thing is certain: As long as we are paying our necessary bills now, the more we save for the future, the better.