The golden years: After tens of thousands of working hours, it's now your time to do what you want. Travel the world. See Paris. Go fishing. Or maybe even something as simple as quietly reading a book or actually enjoying the morning paper. However, these picturesque visions of our retirement are often clouded by questions such as, “Am I saving enough?” Or, “Where should I be in my savings at this point?".
While these questions might seem fairly simple, they rarely have straightforward answers. The fact is, we all have different visions of what our retirement will look like and, as importantly, when it will actually occur. A recent study by the Transamerica Center for Retirement Studies quoted in an article on CNBCfound that 58 percent of workers say they plan to work past age 65 — if they retire at all.
Regardless of when you started saving or where you're at now, there are ways to understand where you should be and strategies to ensure you end up where you want to be.
In Your Twenties
Most people in their twenties don’t think about retirement at all. It’s understandable, considering how far off many twenty-somethings consider retirement to be. While it's understandable that retirement isn't a top financial priority for many younger workers, investing in retirement early is still crucial for a variety of reasons.
Unlike the baby boomers, this new generation carries much more personal responsibility for developing and funding their retirement. Samantha Sharf, a finance writer for Forbes, explains,
“Thanks to the demise of corporate pensions and the rise of independent retirement accounts [twenty-somethings] are personally responsible for our nest eggs to a degree that would have been unimaginable just a few generations ago.”
The truth: Most financial advisors would argue that by 25, it's wise to invest 20 percent of your annual salary in an account set aside strictly for retirement. That means if you are making $40,000 in annual salary, you should have at least $10,000 saved for retirement.
What you can do:
- Save small amounts often. If you start saving small amounts now — 10 percent of every check — you will have to pull less from each paycheck later.
- Understand Roth IRA’s. While a good majority of those in their twenties are aware of 401(k) benefits, they tend to overlook Roth IRAs. The main difference: 401(k) withdrawals are taxed like every other part of your income and Roth IRA withdrawals may not be taxed, depending on the factors outlined here.
- Get savvy. Do your research and understand all the options available to you. At this point in your life, you have over forty years of money management ahead of you. A better understanding now means struggling a lot less in the future.
In Your Thirties
Although your thirties will typically come with a mortgage, kids, and a whole host of other expenses, it's also a time to ramp up your savings. This stage of life offers a good opportunity to build on the solid base you created in your twenties, as your income will likely begin to rise with advances in your career.
The truth: By your mid-thirties, you should have saved at least once or twice the amount of your average annual salary for retirement purposes. According to the CNBC article,
“More than three-quarters of 30-somethings are saving for retirement in a work-sponsored plan, with a median $45,000 saved.”
What you can do:
- Nail Your Number. By this point, you should have not only a firm number in your mind that your retirement account needs to reach, but also a strong financial map that you can follow to ensure you hit that number.
- Consult the Experts. If you haven't yet, your thirties are a great time reach out to a financial advisor, at least on a consulting basis, to determine the best strategies for moving forward.
- Save Outside the Office. Committing the max amount to your work retirement plan isn’t enough. Open a separate, personal retirement account and make steady contributions.
In Your Forties
Your forties will really solidify your financial future. At this point, according to Lesley Haggin Geary of Bankrate,
“[Adults] are hitting peak earning years, and they should be well on their way to reaching their long-range savings goals, too.”
The truth: By the time you turn forty, you should have saved at least two to four times your average annual salary. If you are earning $60,000 a year, somewhere around $100K-$140K in retirement savings would be great pacing. According to CNBC, the average forty-something has saved $63,000.
What you can do:
- Max Out Savings. Your 401(k) should be funded to the max limit at this point in your life. Ensure that you're taking full advantage of your employer's benefit matching offers.
- Pay Down Debts. If you have any debts, you should be paying them off and attempting to not incur any other long term costs. Avoid debt early so this step doesn't have to impact your retirement goals!
- Invest in Your Health. People often overlook health as a factor in retirement readiness. If you have to pay huge medical bills down the line, your retirement savings are really going to take a hit. Make your health a priority sooner rather than later to make sure you can enjoy retirement the way you want to.
In Your Fifties
If you haven’t been honest with yourself about bad savings habits yet, you'll realize the full impact of it now. At this life stage, being candid and realistic with yourself is more important than ever. If 65 is the age you wanted to retire, are you still on track for that goal? If you're not, what can you do to make it a reality?
The truth: By this point, you should have saved anywhere between 2 and 7 times your annual salary, depending on what you earn. According to the previously cited CNBC article:
“...You should have savings equivalent to five times your salary by age 55, or $250,000 for someone earning $50,000 per year.”
What you can do:
- Play catch-up. Catch-up contributions allow individuals 50 and older to contribute up to an extra $5,000 to a 401(k) and $1,000 into an IRA.
- Reassess your exit. If you haven't yet set a clear date for when you want to retire, choose one. If you have, figure out how close you are to the goal and adjust your date. It may be necessary to realign your expectations of what your retirement will look like depending on your savings. This is okay and perfectly normal.
The amount of money you will need once you retire will vary depending on a wide variety of changing factors, meaning that you should be regularly evaluating and calculating your retirement readiness. I hope these guidelines and tips will help you solve the retirement puzzle, ensuring that you and your family are well on your way to a happy future.
The guidance of a financial advisor can be invaluable for those who are proactively planning for retirement. Please know that I am always happy to discuss any concerns or questions you may have, so don't hesitate to reach out!
What questions do you have about your retirement savings? Join the conversation by tweeting @Lindsey2Wealth!