Financial security in retirement doesn’t happen overnight. Planning for retirement can take years and span over several decades. That’s why it’s important to start saving or at least start thinking about a retirement strategy early in your career.
According to a 2020 report published by the Board of Governors of the Federal Reserve System, 62% of Americans ages 18 to 29 claim to have started a retirement savings fund. However, only 28% believe they are on track to prepare for retirement financially.
There is no standard age for saving for retirement, but the sooner you start, the more time you allow your money to grow. Keep reading to discover some key financial strategies and how you can implement them into your retirement plan.
When To Start Saving For Retirement?
There is no one-size-fits-all approach to saving for retirement. Your current financial situation may not lend itself to putting away money for retirement. However, signing up for your employer-sponsored retirement plans or opening up an Individual retirement account (IRA) when you start your career can put you in a good position to start developing a retirement strategy.
While 39% of adults started saving for retirement in their 20’s according to a report from Morning Consult, it’s never too late to get started. Although not starting early may impede your ability to have sufficient funds in your retirement account.
Establish Retirement Goals
Your retirement dream is the foundation for creating a retirement plan. Some people envision traveling the world. Some may want to buy a beachfront property, while others may want to relax and spend time with their family.
Establishing your goals can not only keep you motivated to one day reach your dream retirement, but, more importantly, it will help you understand how much money you’ll need to save and how close you are to making that dream a reality.
Retirement Savings Rule Of Thumb
According to a survey conducted by Charles Schwab, the average American believes they should have $1.7 million saved before retiring. Ultimately, your retirement goals and finances should guide you to determine how much money you’ll need before retirement. However, financial experts believe that the following rule of thumb can put you in a good financial position when it comes time to retire.
The Golden Rule – Save 15% Of Your Income
Assuming that you’ll retire around 67 years old, financial planners believe one of the best retirement savings rules of thumb is to save 15% of your gross income. That would be your post-tax income and before any matching contribution is made from your employer. It’s recommended to put some of your income into a tax-advantaged retirement plan, such as an employer-sponsored 401(k) or an individual retirement account (IRA).
However, saving 15% of your gross income may not be feasible for some, especially those just starting their careers and don’t make that much money. We suggest saving what you can while addressing other financial obligations. Putting away at least 1% is better than nothing.
Retirement Savings By Age
As mentioned previously, the average American believes they’ll need to have at least $1.7 million saved before retirement. Many financial experts agree that $1 million is a good starting point, but future generations may need to save more as the value of the dollar decreases.
According to the Bureau of Labor Statistics, older households or a household run by someone 65 or older spends on average nearly $48,000 annually or roughly $3,800 per month on expenses such as housing, food, transportation, clothing, healthcare and other lifestyle expenses.
If you spend nearly $3,800 per month and have $1 million saved for retirement, the money would last about 21 years before it runs out. Of course, this would depend on your lifestyle, spending habits, the rate of return on your investments, withdrawal rate and inflation.
Additionally, the location can affect your retirement savings. Some states require a higher cost of living than others.
For example, if you retire in Arizona, the average savings necessary to live comfortably is roughly $1.1 million. While the cost of living is 3.5% lower than the national average and the cost of homeownership for senior citizens ranks 15th lowest in the nation, the life expectancy is higher than the national average. Arizona residents who are 65 years old are expected to live an additional 20 years—nearly a year more than the national average.
While it’s possible to retire with less than $1 million, here’s how you can achieve that threshold by saving at each age.
Saving Retirement Money in Your 20’s
Suppose you plan to retire around the age of 62. In that case, when you are eligible to receive social security benefits, the following is how much you should be saving toward retirement in your mid-twenties if you plan to adhere to the 15% rule.
- If you earn a 4% return on your savings, you’ll need to earn about $68,000 annually and save roughly $850 per month.
- If you earn a 6% return on your savings, you’ll need to earn about $40,000 per year and save roughly $500 each month.
- If you earn an 8% return on your savings, you’ll need to earn about $23,000 annually and save roughly $300 per month.
As the percentage of return increases, the amount you’ll need to earn and save decreases. If possible, find a retirement plan that works for you.
Saving in Your 30’s
Following the 15% rule of thumb may be more difficult if you haven’t saved money toward retirement in your 20’s, but it’s still achievable. Here’s how that would breakdown:
- With a 4% savings return rate, you’ll need to earn approximately $87,000 annually and save roughly $1,000 per month.
- If you earn a 6% return on your savings, you’ll need to earn about $56,000 per year and save roughly $700 each month.
- With an 8% savings return rate, you’ll need to earn roughly $35,000 annually and save about $430 per month.
Retirement Savings by Age 40
- With a 4% savings return rate, you’ll need to earn approximately $155,000 annually and save roughly $2,000 per month. However, saving roughly $2,000 per month would exceed the $19,500 annual limit for 401(k) contributions.
- If you earn a 6% return on your savings, you’ll need to earn about $115,000 per year and save roughly $1,400 each month.
- With an 8% savings return rate, you’ll need to earn roughly $84,000 annually and save about $1,000 per month.
Determine A Retirement Plan That Meets Your Goals
One of the most important aspects of becoming financially secure for retirement is to find a plan that works for you and your family. There are several retirement accounts to get you started. If you have an employer-sponsored 401(k) with a matching contribution, that is a great place to start. If you don’t have a workplace retirement plan, banks and credit unions offer various retirement accounts known as individual retirement accounts. Some of the different types of IRA’s include:
- Traditional IRA: This type of retirement account allows you to make tax-deductible contributions. Money put into a traditional IRA is tax-deferred until it’s withdrawn. A traditional IRA may be beneficial for individuals who believe they’ll be in a lower tax bracket when it comes time to retire.
- Roth IRA: Arguably the most popular individual retirement plan because, under most circumstances, funds are withdrawn tax-free. With a Roth IRA, the money you contribute has already been taxed, allowing you to grow your retirement fund tax-free.
- Rollover IRA: This type of retirement plan allows you to roll over any more you have contributed toward a qualified retirement account to a traditional IRA. Roller means you can move eligible assets from an employer-sponsored plan to an IRA.
Each retirement plan has perks that may be more beneficial to you. However, the best retirement accounts generally allow for tax advantages, matching contributions or a savings incentive.
Choose Arizona Central Credit Union As Your Retirement Savings Partner
Similar to a side view, retirement may be closer than it appears. Meaning retirement planning and being financially stable during retirement is a long process. It’s best to start thinking about it as soon as you start your career. The sooner you start, the longer your money has to grow.
No one wants to worry about finances when it comes time to retire. Get started today with Arizona Central Credit Union’s individual retirement accounts. We offer various IRA’s, including a traditional IRA, Roth IRA, Rollover IRA and Coverdell Education Savings Accounts. Contact Arizona Central Credit Union today to see how we can help you enter your golden years with confidence.
