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How Much Should You Save? Meet Your Retirement Goals with These Tips

How Much Should You Save? Meet Your Retirement Goals with These Tips

Kim Lankford, Monster Contributing Writer

If you’re 40 or younger, it’s tough to predict how much money you might need when retirement is decades away. A few key calculations, however, can help you make sure your savings plan is on track.

Saving Depends on Life Stage

Rebecca Pace, a Cincinnati-based financial planner and CPA, recommends putting aside at least 10 percent of your income when you’re in your 20s and 30s — and even more if you’re single. “I wouldn’t expect they could continue to add a lot to it while they’re raising a family, but if they’ve put something aside early, it should continue to work for them until they can save again,” she says.

Another good reason to save aggressively now: The younger you are when you start, the longer your money will have time to grow. This means you’ll need to set aside a lot less to reach the same goal than if you waited just a few more years to get started.

For example, if you’re 25, you only need to invest about $3,600 per year to end up with $1 million by the time you’re 65 if your investments return 8 percent per year. But if you wait until you’re 30 to start, you’ll need to set aside about $5,400 per year to end up with the same $1 million at age 65. And starting at 40 requires $12,700 a year to reach the same magic $1 million. Finally, you’ll need a whopping $34,000 per year to reach the same goal if you procrastinate until you’re 50.

A recent study by T. Rowe Price reveals most people need to set aside at least 15 percent of their pretax salary for their investments to replace 50 percent or more of their current salary in retirement. This may be enough if you’re getting an extra 20 percent or more of your preretirement income in Social Security and pension payouts. But you’ll need to fill more of the gap yourself if you don’t expect to receive a pension, live in an expensive area or will still have a mortgage or other housing payment after retirement.

How to Afford to Save

The reality is that it isn’t always easy to set aside money for retirement when you’re nowhere near your peak income and just trying to pay your regular bills. The good news: You have plenty of help. The IRS and most employers kick in some money, so you can set aside a substantial amount of money without taking much of a hit in your paycheck.

For example, if your employer matches 50 cents on the dollar for up to 6 percent of your salary and you earn $40,000, you’d get the maximum match if you contribute $2,400 in a 401k. In that case, you’d get $1,200 from your employer, bringing your total contribution up to $3,600.

And that $2,400 doesn’t lower your paycheck dollar for dollar either, since you’re investing the money pretax. If you’re in the 25 percent bracket, investing $2,400 would only reduce your take-home pay by $1,800 for the year. So it actually would cost you just $150 per month to end up with a $3,600 contribution every year. Start at age 30, and you’d have about $670,000 by age 65.

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