When you are young and just starting down the employment path, it’s easy to ignore the fact that you’ll face retirement some day. But some day is not as far away as you think. If it arrives and you haven’t prepared, you may face some tight living in your “golden” years.
How much you need to save to be prepared is a personal question. How well do you want to live in retirement and how much do you earn? A rule of thumb is to estimate what you will be earning the year you retire. Subtract your retirement income, such as Social Security, pension, trust accounts, etc.) and then multiply it by the number of years you expect to live after retirement. Not exact, but at least a figure to shoot for.
The answer to how much you should be saving, simply put, is “as much as you can, but not more.” The earning years should not be miserable in order to finance the retirement years. But retirement savings must be high up on your priority list.
You can’t get a loan to finance your retirement. To make the figures more real, make a pie chart with five “slices.” Label them “bills,” “debt,” “spending,” “short-term savings” and “long-term savings.” If the long-term savings (i.e., retirement) is too small, look at the other categories and see where it is possible to make a shift. Possibly you need to trim short-term savings a bit in favor of long-term. Be wise, don’t decimate your emergency funds to make the difference. Be willing to sacrifice a few things, like lunching out, being too free with entertainment expenses, making unnecessary clothing purchases. Focus first on the necessities.
What kind of retirement account should you consider? How long do you have before retirement and how much do you make? Taxes should be a large part of your consideration. Some programs, such as an employee-sponsored 401(k), allows you to defer payment. Optimize your contribution to a company plan, especially if your employer offers a match.
Speak with a professional if you need help understanding your options, how to invest to maximize your returns. He or she can guide you through the maze of possibilities and help you adopt the best plan for your circumstances.
Yes, there are many questions. But the one that can be easily answered is: When do I start? The answer: Now.