Saving for Retirement: How Much Do I Need?

October 10, 2007

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For most Americans, pensions and social security alone will not see them through retirement. You need to take an active role in planning for retirement. When planning for retirement, the most obvious concerns are: 1) how much do you save? and 2) how soon should you start? Saving early and often is the best mantra for building your nest egg.

No matter what your age, it’s never too late to build your retirement savings. One of the biggest challenges you may face when saving for retirement is procrastination. The fear of not being able to save enough can actually prevent you from taking any action. Saving for other things such as a home or children’s educations can derail retirement savings as well. Remember: while other financing options exist for your home and your children, there are no scholarships or loans available for retirement. Regardless of your other commitments, retirement planning is a must.

The good news is that a little retirement planning today can lead to a healthy nest egg tomorrow.

Questions to Ask Yourself
So how much do you really need? Experts say you should be prepared to replace 75% to 85% of pre-retirement earnings. Retirement savings will consist of both personal savings and, perhaps, some social security benefits.

Once you know how much you need, you can decide when to start your retirement. This helps you figure out how many years you have to build your nest egg. You should also consider your future lifestyle. Are you going to live modestly in retirement or travel to exotic places? Many Americans relocate to a smaller home and less expensive area to help stretch retirement dollars.

There are some other important issues to consider when planning for retirement. What could impede your saving for retirement? We go through many life changes that can affect retirement savings, such as the birth of a child or loss of a spouse. You might also change your spending and/or saving habits. Job loss or career change can also impact retirement savings. As your life evolves, you may need to rethink your retirement strategies.

Once you know how much you’ll need to put away, you can figure out a savings plan with the help of online retirement calculators. Start thinking about retirement strategies that will work for you. Again, these strategies may vary, as you get closer to retirement age.

Tips for Saving for Retirement
While retirement strategies differ, one factor remains the same: you must save. Here are some easy ways to get started:

Money we never see is money we rarely spend. The easiest way to save for retirement is to take part in your employer’s 401(k) plan. This is an especially smart retirement strategy if your employer matches your contributions. Maximize your contribution by putting in at least as much as the maximum employer match (usually up to 15%).

If you are self-employed, take advantage of a SEP IRA (simplified employee pension plan). Like a 401(k), money saved in a SEP individual retirement account is tax deductible. Maximum contributions are a percentage of one’s income. Once you get that tax-deferred retirement account going, resist the temptation to access it since early withdrawals can mean steep penalties. Saving for retirement shouldn’t mean forgoing a regular savings account for financial emergencies.

Another way to save for retirement is to enroll in an automatic savings plan. This allows you to electronically transfer a specific amount regularly into a savings account. Again, money not in our pockets is money we rarely miss.

Paying off your mortgage is another great retirement strategy. It frees up a lot of cash in retirement and allows for more fiscal flexibility.

Finally, you don’t have to retire at a certain age. Many seniors find part-time work fulfilling and an extra paycheck helpful. By delaying retirement just a few extra years you can significantly increase your social security benefits as well.

No matter when you wish to leave the workforce, planning for retirement should be a top priority. Take your personal goals into considerations, and develop a strong retirement strategy as early as possible. And it’s never too late to start saving for retirement; many retirement strategies are still available regardless of how close you are to retiring. By planning for retirement savings now, you’ll be able to enjoy your retirement later.

Posted in Banking & Saving Accounts