You probably know it’s important to make an effort to save for retirement. The average retiree today only gets about $23,000 a year from Social Security, which isn’t a lot of money to live on. So it’s essential to have savings to boost your senior income.
Of course, that begs the question: How much should you be saving for retirement? There’s some general guidance you can use. But a better bet is to ask yourself a couple of key questions.
Figuring out your savings goal
Financial experts typically recommend saving 15% to 20% of your income for retirement. If you can pull that off, fantastic. You’ll be doing your future self a world of good.
But let’s get real. Many of us can’t afford to part with 15% to 20% of our monthly paycheck. Instead of pushing yourself to save an unrealistic amount of money, a smarter move is to ask yourself two key questions.
1. Do I get a 401(k) match?
If you do, your goal should be to save enough money to claim it in full. If your employer offers to match up to $3,000 in annual 401(k) contributions, you should try your best to save $250 a month for retirement. This will effectively give you $500 a month in your 401(k) ($250 from you and $250 from your employer).
2. How much can I comfortably afford without making myself miserable?
Maybe you don’t have a 401(k) match, or even a 401(k) at all. And even if you do, maybe claiming that full match just isn’t in the cards right now.
Rather than stress, set up a budget and figure out how much you can afford to contribute toward retirement each month without falling behind on bills and without denying yourself too many of the things that make life fun.
If you currently spend $300 a month on leisure, it’s pretty reasonable to cut that down to $200 and put $100 a month into an IRA or 401(k) for retirement. But should you force yourself to spend no money on leisure so you can put $300 a month into a retirement plan? That’s a no.
You can’t deny yourself every single fun thing in your life just to save for retirement. If you do that, you risk burning out, which could lead you to give up on retirement savings altogether.
A great way to grow your retirement savings
The amount of money you save for retirement should hinge on what you can afford. If that’s 18% of your paycheck, awesome. If it’s 2%, know that 2% is better than 0%.
That said, one thing you should do is invest your savings in the stock market. Over the past 50 years, the S&P 500’s average annual return has been 10%, accounting for good years and weak years.
Even if you only invest $50 a month for retirement, if you do so over 40 years and your portfolio gives you a 10% average yearly return during that time, you’re looking at about $265,000. That’s more than double the average $129,200 IRA balance today, according to Fidelity.
In fact, rather than stress over how much to save for retirement, the most important thing to do is get started immediately so your money has the most amount of time to grow. If you’re not signed up for your company’s 401(k) yet, do that now (ask HR about it). And if you don’t have access to a 401(k) plan through your job, click here for a list of the best IRAs and open one today.
