The Chinese proverb says the best time to plant a tree was 20 years ago, but the next best time is today. The same goes for saving for retirement. If you are a youngster in your 20s reading this, we’re impressed – you are probably doing the right things already. If you start investing early, compounding works in your favor all the more. I’m sure many readers are a bit more seasoned at life, however. It’s true that if you get a late start in the retirement savings game, you then have to commit to a higher savings rate than the younger generation, but you can still get to the finish line in style. We can help.
You’ve heard the convincing (and convicting) talks from financial advisors and personal finance gurus about how you should be saving as much as you can toward not only retirement but also other important financial goals like your kids’ college education and a Health Savings Account. Do you feel overwhelmed yet? It’s ok. Baby steps are often the best course of action toward saving for these milestones.
At TFC, one of the first things we recommend is for you to take a look at your employer’s retirement plan. I’ll bet you there is a matching feature, which we have talked about before. “The match” is when you contribute a little dough from your bi-weekly paycheck into your 401(k), and then your company does the same. The match is free money, essentially (though there might be a vesting period whereby you must be employed with the company for a few years before it’s really yours). The match is usually an extra 3% kicker from your job. For example, if you contribute 6% to your 401(k), the employer contributes 3%. And just like that, you are saving 9% of your salary for retirement!
Now that we have gotten that out of the way, you are clearly on the right path toward sufficient retirement savings! But how much is enough? As John D. Rockefellers said, “just a little bit more.” There is no clear-cut, one-size-fits-all answer. You can scour the financial news and personal finance websites to find rules of thumb, however. And the advice is probably good. Some say it’s ideal to save at least 15% of your pre-tax income per year – that is solid advice, in our opinion. Others get more into the weeds by asking for some personal information like your age and health condition (in order to determine how long you might live and what your spending needs might be). And then there is Social Security to consider. And any possible windfalls from inheritance.
Another common thought is to have saved a certain amount of your annual salary by a certain age. If you are 30, have an amount equal to your salary saved in a retirement account like a 401(k) and/or IRA. By age 40, have 2x your salary. Age 50 – 6x. Then by the ripe old age of 65, have 10x. And be sure to defer social security benefits until age 70 (we just had to include that little PSA in there!).
Perhaps you are in your peak earning years and able to contribute more toward retirement. Look to max out your 401(k), IRA, and HSA contributions. Right now, the most you can put into a 401(k), IRA, and HSA is $19,500, $6,000, and $3,550, respectively (these are 2020 limits for an individual under age 50 – view our library for a specific breakdown of account contribution rules). So you can have nearly $30,000 of retirement contributions into tax-advantaged accounts. That’s impressive no matter who you are!
The bottom line – it’s unique to you! Of course, you should save as much as you can while balancing your day-to-day obligations (as well as enjoying the present!). It’s best to sit down with a professional fiduciary financial advisor to get a sense of where you stand. Maybe you are already saving enough, maybe you can beef up your savings. We can help you allocate your retirement savings towards the right types of accounts to maximize your future wealth.
Here’s a little trick to make saving easier – it might be daunting to think about saving 15% or 20% of your income. But re-frame the question this way, “can I live on 80% or 85% of my income?” While every situation is unique, we get that you want some guidance on how much to save. It begins with spending less than what you make. Live within your means, then look to save 15% of your salary each year.
Once you hit a saving milestone, keep going! Another thing you can do to increase your retirement saving is to use the auto-escalation function in your 401(k) plan. That’s where each year the account automatically increases your contribution rate by a certain percent. So you end up saving more without really noticing it.
Gameplan –
Login to your 401(k) site and ensure you are contributing to the matching percentage. Make sure you are investing in the right mix of securities for your risk tolerance. If you have those boxes checked, open a Roth IRA – you can do that at all the big brokerage sites with no fees. Of course, TFC can do all of this for you! Analyze how much you can save each month, then establish a monthly contribution from your checking account to your Roth IRA and make sure you are investing in stock and bond funds (let that money work for you!). Next, if you have an HSA, log in to that account and set up another line of contributions. By taking these steps, you are on your way toward a prosperous future.
Here’s the point
- There’s no black & white answer for everyone as to how much is the right amount to save for retirement
- Rules of thumb are out there, and they are probably good general guidelines
- To be intentional about your long-term plan, you should consider getting help from a professional financial planner who will work in your best interests
Action items
- If you are just starting out, take baby steps like contributing to your employer’s 401(k) match. Once there, you can make the next move like increasing your 401(k) contribution and/or saving via an IRA.
- Aim to save 15% of your pre-tax salary into tax-advantaged accounts like a 401(k), IRA, and Health Savings Account
- Also, use the multiple of your salary rule we mentioned as a guideline for how much you should have saved by age
- Consider your lifestyle & spending, health situation, social security benefits, possible inheritances, the list goes on! For a detailed analysis of your true retirement needs, sit down with us at TFC. We can craft a tailored strategy to ensure you are on the right track.