Financial responsibilities occur early in life, but before you know it, paying your bills and getting a promotion are not the only things that you’ll worry about. Pension systems can help alleviate some of the concerns that you have, but a pension shouldn’t be the only form of retirement that you have. Will you ever be financially independent? How much should you save for retirement?
Investing in your future is something that you should be doing, whether you’re in your 20s, 30s, 40s or beyond.
Everyone’s financial situation is different, and while the recommendations that are outlined below are a good starting point, many people don’t save enough. You may have setbacks, start saving later than hoped or simply didn’t know how to save properly – it’s okay.
You can start saving and investing enough today to have a secure retirement later in life. The most important thing is to start today.
How Much of Your Annual Savings Should Go to Retirement
Retirement isn’t the same for everyone. You may want to travel, give money away and have a high-priced lifestyle, or you may want a simple retirement that doesn’t require as much in retirement accounts to be comfortable.
You’ll also need to consider:
- Retirement income
- Rent and/or mortgage
- Auto payments
Investments can generate income, where you take out 5% of your investments per year, living off the interest. A lot of factors must be taken into account to really understand if you’re saving or investing enough of your annual salary to live a comfortable life.
How Much Should You Have In Retirement Savings By Age?
Everyone looks for a concrete figure of how much money they should have by a certain age. Some people want to hit a specific milestone: $1 million, £1 million or €1 million, or whatever currency equivalent you may have.
But it’s better to judge your ideal savings by a multiple of your income.
For example, the following is recommended:
- 30 Years Old: 1 times your income
- 40 Years Old: 3 times your income
- 50 Years Old: 5 times your income
- 60 Years Old: 7 times your income
- 70 Years Old: 9 times your income
A lot of factors will play a role in how much retirement you should have by each of these ages, such as your current income, planned retirement age and the lifestyle that you want to maintain.
How Much Income to Put Away for Retirement
As a general rule, saving 15% of your income for retirement is recommended. The problem is that a lot of people live from one paycheck to the next, so set aside a manageable amount of your salary for retirement, even if it’s not 15%.
If you can only put 5% of your income into retirement, try adding 1% more of your income every year until you reach the 15% threshold.
Income is a General Word
While the term “income” is used, this doesn’t mean that you need to use just your income to reach these savings limits. You can include your investments and retirement funds. For example, if you make a small investment of 10% of your income and it turned out to grow to 10 times your annual income, this will suffice.
Of course, if you plan to travel the world, buy a new home, send grandkids to the best schools or live an extravagant lifestyle, you may need 20 times your income to meet your retirement needs.
Start Early and Benefit from Compound Interest
Investing early allows you to take on higher risk tolerance. When you’re young, you can invest in stocks or other investments that have higher risks and higher returns. You have time when you’re younger to make smart investments that may be risky but can also generate 5% to 10% in returns per year.
The earlier that you begin investing, the more time you have to make your money work for you.
When you get older, reallocating your investment portfolio to lower risky investments is often recommended. If you’re nearing retirement, you can take on much less risks than when you’re young.
It’s important to make saving for retirement a top priority. When you learn to put some money aside every year, slowly increasing this amount for retirement, you’ll be able to start accumulating wealth and inch closer to your dream of a secure retirement.
How Much Money Should You Save for Emergencies?
Life is a series of events, and sometimes, these events are emergencies that cost a lot of money. You may lose your job or suffer from a medical emergency, which lowers your potential earnings.
The amount of money to keep in an emergency fund should be, at least, 3 to 6 months of expenses.
A few points to keep in mind:
- As you age, every 10 years or so, the ideal savings balance will increase. You may save 10% more between ages 30 and 40 and 20% more by the time you’re 50.
- Adding to your savings is never a bad thing.
- As your life circumstances change, you may need more or less in emergency fund savings. Typically, an emergency fund will require less money starting at age 60 on because you’ll, hopefully, have less debts.
An emergency fund can be kept in a savings account, or it can be kept in a low-risk investment vehicle that allows you access to the funds with little-to-no penalties for doing so. Investing your emergency fund savings, even in a low interest rate account, is still better than letting the money sit and not accrue interest.
Note: These are expenses – not salary. Jot down your expenses: rent/mortgage, food, utilities and additional costs. Once you understand your full monthly costs, you can build an adequate emergency fund.
For a lot of people, these figures seem unattainable or simply too high. The good news is that while these figures are recommended, there’s still time to reach your retirement goals. If you haven’t put enough money away and need to invest more heavily, you can start doing so today.
Long-term, financial commitment is what will allow you to retire comfortably.
[ Sources ]
Japan National Pension Office. (n.d.). Nenkin. https://www.nenkin.go.jp/international/japanese-system/nationalpension/nationalpension.html
How much money should I save each year for retirement? | Fidelity. (n.d.). Fidelity. https://www.fidelity.com/viewpoints/retirement/how-much-money-should-I-save
How Much Should You Be Saving for an Emergency? (n.d.). Wells Fargo. https://www.wellsfargo.com/financial-education/basic-finances/manage-money/cashflow-savings/emergencies/