Most people know they should be saving for retirement; however, with rising student loan balances, credit card debt, and high car payments becoming more of the norm, saving for retirement can seem like a distant goal.
Even though you might have to focus on several immediate financial responsibilities, you’ve probably wondered, “How much money do I need to save for my retirement?” Maybe you haven’t started saving at all or maybe you’ve been contributing to a retirement plan since you started working. Either way, you’ve likely wondered if you’re saving enough or if you’re on track to retire by a certain age.
Are You on Track for Retirement?
Charles Schwab released a 2019 401(k) participant survey in June 2019. The results show that people, on average, think they need $1.7 million to retire comfortably. However, half of the participants reported saving less than 10% of their incomes in their retirement accounts.
If $1.7 million sounds like an unattainable goal, there’s another way to gauge if you’re on track to save adequately for retirement. Fidelity Investments recommends “to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.”
If you’re not quite there yet, that’s ok. What’s important is to take action today to change your financial habits or adjust your contributions so you get back on track. You can also use a retirement calculator to get another assessment to see if your current savings will grow to be enough to reach your retirement goals.
8 Steps to Develop Your Own Retirement Plan
Of course, you don’t have to save $1.7 million just because that’s the average number people think you need to retire comfortably. There are many people who have retired on less than that. It really depends on your goals and the lifestyle you envision for your retirement years.
Decide What You Want to Do In Retirement
In order to get a truly accurate retirement number for your personal retirement goals, think about what you want to do in retirement. Do you have a flair for traveling or want to see the world? If so, you might need to save more money for retirement to help pay for your travels. Or, maybe you’ve already seen what you want to see and would rather spend your years of retirement gardening, reading, or spending time with your grandchildren. If so, you might not need as large of a nest egg.
Consider Your Gender, Age, and Health
Women tend to live longer than men, so if you’re female, you might need to consider saving more for your retirement goals. Also, healthcare gets more expensive as you age, so while you’re young, make a plan for how you’ll pay for your healthcare needs as you get older. Many people like using Health Savings Accounts for this purpose (and for the triple tax benefits.)
Plan Your Income Streams
Even though you’re likely contributing to social security, you might want to consider having additional income streams in retirement. Some examples of additional incomes streams include investment properties, dividend income, and business partnerships. Many of these additional incomes streams require years of active work in order to create passive streams of income in the future, so make them a part of your retirement plan today.
Live Below Your Means
Once you’ve used a retirement calculator and created a plan to achieve your nest egg “number” it’s also important to take a hard look at your financial habits. After all, saving for retirement isn’t just about having a certain dollar amount for your future. You also have to have the financial discipline to maintain your financial health now and while you’re in retirement.
One of the best habits you can develop is spending less than you earn each and every month. This helps you to free up more money to invest in non-retirement accounts so you can retire even earlier than predicted.
Admittedly, living below your means can become a challenge if you encounter health problems or have a sick parent or child. So, do your best to eliminate the number of expenses that cause financial pressure as you get nearer to retirement.
Avoid High-Interest Debt
Paying off and avoiding high-interest debt is another key ingredient for being able to retire on time or even early. High-interest debt can include credit cards, personal loans, payday loans, car title loans, and even some student loans.
In general, mortgage debt is typically low interest, while credit card debt interest rates can hover around 20%. So, if do have credit card debt, it’s best to eliminate it as quickly as possible. The reason is paying off high-interest debt leaves you more room to allocate your money towards your savings and investing goals.
Contribute to Your Work Sponsored 401(k) Plan
If you work for an employer that offers a 401(k), a good rule of thumb to invest in that, especially if they’re offering you an employer match. Most financial experts recommend that you contribute up to the employer match to make sure you’re taking advantage of any and all free money that could come your way.
Max Out Other Retirement Vehicles
If you don’t have an employer-sponsored retirement plan, you can still invest in retirement accounts by opening a Traditional IRA, a Roth IRA, solo 401(k) or SEP IRA if you’re a business owner. You can also open a brokerage account and invest any excess cash in there so you can access it before you turn 59 ½ ( the age in which you won’t incur a 10% penalty for withdrawing from your retirement savings.)
Focus on Your Future, Not Your Children’s College Costs
Lastly, remember that your children can borrow for college, but you can’t borrow money for your retirement. So, if you’re considering paying for your children’s education, make sure it won’t interfere with your own retirement goals.
Make Your Retirement Goals a Reality
All in all, you do have the power to make your retirement goals a reality, even if you’re starting late in life with little to nothing saved. By adjusting your habits, paying down high-interest debt, and making a plan to invest in your future, you can take control of your money and ensure you’re able to live out your years financially secure.