“It’s never too early to start saving for retirement” is probably something you have heard from either your parents or peers. However, this prompts us to ask the next question: how much should I save? If you go ask several different financial professionals, you will probably get a different answer from each of them. However, there are some steps you can take to get a rough ballpark of how much income you should expect to replace when you stop working.
Looking to Future Spending
First off, start with what you know now. Write out all of your expenses and figure out if any of these will go up, go down, or disappear in the future. From this point, estimate what sort of lifestyle you want to live in retirement. This can mean calculating trips you may want to take, or any other leisure and hobby expenses. Once you have outlined all of these expenses, multiply this number by twelve to see how much you need to make each year to accommodate your future needs.
What the Various Professionals Say
Although the above exercise helps you with getting some solid numbers to shoot for, it is extremely difficult to predict the future as many professionals will tell you. No one knows what their future medical expenses will be and what the market will be like when you reach retirement age. However, there are a few other numbers you can shoot for to prepare yourself.
According to a Bloomberg article where they shared the responses of different financial professionals to this question of retirement savings, there are many approaches that all have their pros and cons. We will just highlight a few of these options.
The first thing you can look at is your 401(k) plan if you have one through an employer. Typically, people only save about 3 percent, which is matched by their employer, making it 6 percent. This is not enough, but you may not be able to get more savings out of your 401(k) plan since employers usually cap how much someone can save.
Another way you can determine how much to save is to base it off of your income. According to Gary Burtless, a senior fellow at the Brookings Institution, provided his own rule of thumb that states if you make anywhere from $30,000-70,000 a year, you can probably get away with saving 10 to 12 percent. However, once you reach the age of 50, you should reassess. However, be wary of this rule of thumb, for people with lower income may need to save more due to an inability to work all the way to retirement age to receive social security because of deteriorating health or a lack of job stability.
Other rules of thumb you can go by is the industry you are in and your gender. If your industry has a lot of ups and downs, you probably want to consider saving more. Other positions where your income peaks earlier in your life, such as construction workers, will also want to save more earlier. As for gender, women tend to live longer than men. This causes their retirements to be more expensive, which is why saving earlier can prepare for the spending years when you are finished working.
Everyone has a different answer to this question, but you should at least do some estimating to give you tangible numbers to work with. If this seems too overwhelming, you can always try seeking advice from a financial professional. If you are not sure where to start looking, you can always ask family and close friends who they use for their financial planning.