Most Americans dream of saving for retirement with a million dollars in the bank. Living out the rest of their life in comfort on a beach or mountain somewhere. So why aren’t more people able to achieve this goal? There could be many reasons, such as unforeseen health expenses, debts, and divorce.
But, another common reason is that people just didn’t start saving for retirement early enough in their life. Too many find themselves at 55 years old trying to make up for lost time. While there may always be an excuse to not save for retirement, it is important to have a plan. This way, you can make your retirement dreams a reality. So, when might be the best time to start saving for retirement?
When Is The Best Time To Start Saving For Retirement?
The short answer is that you should start saving for your retirement as early as you can. The three most important things you’ll need in order to save enough for your retirement is money, time and compounding interest.
According to a recent Bankrate study, Americans across the board think 22 is the ideal age to begin saving for retirement. The age of 22 is typically associated with graduating college or a trade program and getting your first job. Hopefully, that job is with an employer that may offer a 401(k) or similar plan. If your employer does not offer a 401(k) plan, you could certainly go to your local bank and open an IRA to begin your saving journey.
Here’s an example of what a difference starting young can make:
Say you start saving for retirement at age 25, and put aside $250/month ($3,000 a year) in a tax-deferred retirement account for 10 years. Even if you stop saving, by the time you reach 65, your $30,000 investment will have grown to more than $338,000, assuming a 7% annual return. Think about that, you didn’t contribute a dime beyond age 35.
Now let’s say you put off saving until you turn 35, and then save $3,000 a year for 30 years. By the time you reach 65, you will have set aside $90,000 of your own money, but it will grow to only about $303,000, assuming the same 7% annual return. This means that putting off saving for your retirement required $60,000 of additional investment and the end result will still be $35,000 smaller.
How Do I Get A 401(k)?
401(k)’s are employer-sponsored programs. In order to open one of these retirement funds, first ask the HR department at your work to see if your company offers a 401(k) program for employees. Also check if they’ll match a percentage of any contributions you’ll make. If you have that option, take it! Contribute up to the company match, at least. Otherwise you’re leaving free money on the table. Then, put the rest in an IRA if you want to save even more. As of January 2022, you can save up to $20,500 a year in a 401(k), and up to $6,000 a year (or $7,000 if you’re 50 or older) in an IRA.
How Long Will My Savings Last?
Any time is a good time to start figuring out how long your savings will last, and if you’re still a few years away from leaving the workforce, using a retirement calculator is a great way to gauge how changes to your savings rate will affect how much you’ll have when you retire.
In order to factor how long your savings will last, you’ll need to know the following information:
- How much you currently have in savings
- The interest your current savings is gaining
- How much you’ll plan to withdraw each month from your savings accounts
- If you’ll have any other forms of income (such as social security, stocks/ bonds, pension, or if you plan on working at least part-time)
Use a retirement savings calculator here…
How To Make Your Savings Last Longer
While the calculator gives you a good idea of where you currently stand, there are a few tricks that may help you make your savings last a bit longer.
The 4% Rule
In 1994, Financial Advisor, William Bengen found that if you invest at least 50% of your money in stocks and the rest in bonds, you’d have a strong likelihood of being able to withdraw an inflation-adjusted 4% of your nest egg every year for 30 years. To arrive at this conclusion, Bengen tested his theory across some of the worst financial markets in U.S. history (such as the Great Depression), and found that 4% was the safe withdrawal rate.
He revised his work in 2006 to 4.5% if tax-free and 4.1% for taxable.
How To Save Using The 4% Rule
The method is easy: You take out 4% out of your savings the first year, and each successive year you take out that same dollar amount plus an inflation adjustment.
For example, Let’s say you expect to need $5,000 a month in retirement income, and that Social Security will provide $1,500 in benefits. This means you’ll need to withdraw $3,500 a month from savings, or $42,000 per year. If you multiply $42,000 by 25 (or the number of years you want to have saved for retirement), you’ll get $1.05 million, which is the savings target you should aim for.
Saving for Retirement – The Income Floor Strategy
The income floor strategy suggests that retirees should use guaranteed income only (such as social security or an annuity) to pay monthly bills and other essential expenses. Then, let your invested savings be responsible for your discretionary expenses. That way, you know your basics are always covered.
Kate writes about retirement benefits for retirementinsurance.org. She has a Masters Degree in Social Work (MSW). She has over a decade of experience in assisting elderly and disabled populations navigate governmental and private programs to obtain the monetary assistance they need to lead better lives. As she watched her parents begin their own retirement journeys and navigate similar systems to obtain Social Security, Medicare and other retirement benefits, she gleaned a further personal knowledge about the topic and is eager to share what she has learned with others.