Will I Have Enough Money to Retire?
Statistics from Schwab Retirement Plan Services show that many folks enrolled in a 401(k) plan may not being doing as well as they expect. Perhaps these participants are unaware of how much they should be saving or when they should be saving it.
The Difference Between Saving and Investing
64% of people from Schwab’s study consider themselves to be savers, as opposed to investors. Therefore, 54% of those with 401(k) plans are putting additional money into a savings account, rather than an investment account such as a brokerage account, health saving account, or an IRA account.
The issues here, is that savings accounts typically don’t grow money as quickly as an investment account would.
Smart, adjustable choices
The Schwab study found that 33% of those who were automatically enrolled into their 401(k) have never made any changes to their contributions, and 44% have refrained form making any investment related changes.
In order to optimize the money in your 401(k) account, it’s recommended that you take a more active role, and consistently manage the account. This goes for other investment accounts as well. Many seek help a professional to assist them with their finances, effectively increasing the amount of money acquired.
The 80% guideline
A common rule of thumb for retirement is to have an income that is 80% of your annual income before retirement. For example, if your annual salary is $75,000, you’ll want to have an annual income of $60,000 to retire comfortably.
Of course, this value will vary based on factors such as pensions, part time jobs, medical health, lifestyle wants, and social security.
The 4% Guideline
To help calculate the total amount of money you’ll need to save to build your retirement income, you can divide your desired retirement income by 4%. For instance, if you want to have an annual retirement income of $60,000, you will be required to have a nest egg of roughly $1.5 million (assuming a 5% ROI after taxes and inflation, and limited additional income.)
Savings according to Age
Setting goals for yourself based on your age is a great way to help stay on track for retirement.
There are 2 common techniques for doing so:
Method One
The first method suggests that by age 30, you have at least 50% of your annual salary in total savings by the time you reach age 30. This can be achieved by saving 15% of your gross salary starting at age 25, and investing 50% or more into stocks.
Fidelity’s suggested financial benchmark is as follows:
40 years old: 2x total salary
50 years old: 4x total salary
60 years old: 6x total salary
67 years old: 8x total salary
Method Two
The second method involves saving taking 25% of your annual gross salary, and putting it into savings starting in your 20s. This will include your 401(k) withholdings, and any other savings plans mentioned above. Following this technique, you can reach eight times your annual salary by age 65:
35 years old: 2x total salary
40 years old: 3x total salary
45 years old: 4x total salary
50 years old: 5x total salary
55 years old: 6x total salary
60 years old: 7x total salary
65 years old: 8x total salary
In conclusion
Most Americans are not effectively saving for retirement, despite how simple taking the appropriate actions can be. Setting up a 401(k) or an IRA is a good start, but it shouldn’t be your only step.
Talking to a professional can help you figure out the best way to save for your retirement.
Source: https://www.investopedia.com/retirement/how-much-you-should-have-saved-age/
