Retiring can be exciting—you are no longer required to wake up each morning to devote your life to work. But at the same time, it can be scary, because you now no longer have a job to fall back on financially.
So, when planning for retirement, how much savings is enough? Generally, the exact answer will depend on your lifestyle and the quality of life you wish to maintain in your last years. Read on as we break down exactly how much you should be planning to save for retirement.
How Much Should You Save for Retirement?
Generally, the amount you should save for retirement is 15% of your current annual salary. This helps to automatically adjust your savings to maintain something similar to your current lifestyle. Of course, you should increase the percentage of your savings the closer you draw to retirement.
This is obviously a very general answer, so we will break it down for you in more detail below.
How Do You Know How Much Money You Need for Retirement?
Your income before retirement dictates the amount of money you will need after retirement, with some adjustments. This is because, while you are working, your income dictates the type of house you will have, where in town you will live, as well as your discretionary spending.
Obviously, some things you budget for during your working years, such as work clothes and eating take-out after a long day, will go away when you retire, but at the same time, we expect you to have more hobbies and travel more when you retire, so generally, the amount will balance out.
So, if you currently make $40k per year, we recommend having this amount for the number of years you plan to be retired. With keeping the average life expectancy of 84 in mind, with a retirement age of 65 (with a buffer of 5 years, which can also be used for emergencies as needed), you should plan to save $40k times 25 years, 30 years for a more conservative estimate. This means those making $40k per year should try to save between $1 million and $1.3 million for retirement.
This number can sound intimidating, but if you have an IRA or 401K, remember you don’t need to put this exact number in retirement. Instead, you should just aim to start saving as early as possible, allowing your money to have the most time in the market—gaining interest while you continue to work.
How Can You Save for Retirement?
We understand, saving for retirement is so hard, especially when you don’t have a government pension. And life is only getting more expensive. As it is, you shouldn’t plan on having your children take care of you when you are older because chances are they won’t have anything extra either. Below are some ways that can help lower the pressure of saving enough for retirement.
1. Buy Real Estate Now
If you are in your 30s or 40s, the time to buy a home is now. That way, it will be paid off by the time you retire. While living in a paid-off home isn’t free (you will still have property taxes and utilities to pay), it is easier to manage a paid-off home on a fixed income than one with a mortgage.
2. Plan to Scale Back to Part-Time Before Retiring
Gone are the days when you dipped out of work at 65 to never be seen again. Due to the rising cost of living, combined with global economic uncertainty, many are stopping full–time work at 65, but working part time until the year 70 or 72, depending on physical fitness.
This may sound sad, especially for those who have been looking forward to retiring, but part-time work at a job you enjoy isn’t too bad, and can be a good stepping stone to prepare you for retirement while you still have some money coming in. Your children should be out of the house by now anyway.
3. Freelance on the Side
If you don’t want to work past 65, your best option might be to freelance on the side now to save extra money for the last 10 years before retirement. Some examples include tutoring on the side if you are a teacher, or driving Uber on the side, no matter what job you are holding. You can even just pick up a seasonal job at a store here or there to help you add extra to your savings at the last minute.
4. Downsize Right Before Retirement
Don’t want to work extra and don’t own real estate? We recommend downsizing about 5 years before you retire. Whether this means leaving your three-bedroom place for something with a single room, or moving in with family, this will allow you to stack extra cash before retirement while giving you a more sustainable lifestyle right when you need it.
5. Trim Spending Now
It can be hard to find room in your budget for saving for retirement, but we are telling you now, it is a necessity. If that means you need to cancel fancy subscriptions, or keep the same TV for a decade, know that might be the cost of ensuring you are comfy in your later years.
Tips For Saving For Retirement
Still struggling to save enough? Here are a few tips that might help.
- Start right away (no matter your age)
- Utilize your employer’s match
- Save any extra money that comes your way (inheritance, random windfall, etc.)
- Participate in catch-up contributions if they are available to you.
- Pay down debt at the same time
- Set goals and focus your energy on sticking with them.
- Watch your spending on unnecessary items
Overall, it can be daunting to save for retirement, especially if you already feel you are struggling to get by each month. But saving for retirement is critical, and we recommend taking a second look at your budget to ensure you start as soon as possible. Even just $100 a month can go a long way to keeping you housed and fed during the last few years of your life.
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