Like eating vegetables and exercising, saving for retirement is one of those "shoulds" that you'd like to put off until sometime in the undefined future. But the longer you wait to start saving, the more you have to save every year -- and the higher the likelihood that you'll be unable to retire at 65 or even after that. Should you have 10 percent of your monthly pay transferred directly into a 401k or IRA? Should you pay off all debts before starting to save?
While savings strategies are as numerous as the companies that would like to hold on to your savings for you, what it basically comes down to is this: How much would you eventually like in your retirement piggy bank, and how much time do you have to get it? Along these lines (with a couple important factors added), these calculators are great places to start exploring retirement savings: Fidelity, MassMutual, T. Rowe Price, and CNN Money.
In addition, there are a number of rules of thumb for retirement savings that can help keep you on track toward your goals. First, save for retirement before saving for your kids' college tuition -- you can get loans and scholarships for college, but not for retirement. One rule of thumb indicates that you should plan to collect about 20 times your gross annual income for retirement [source: Roth]. Another suggests that if you start saving in your 30s, save 10 percent of your annual income for basic retirement expenses, 15 percent to retire in comfort and 20 percent for a chance at early retirement [source: Weston].
Calculators and umbrella rules are great to keep in mind, but they're not the end of the story. Keep reading to see if you're really on track for retirement.
A Personal Approach
Unfortunately, calculators and rules of thumb can't predict the future. There are simply too many factors beholden to chance, including potential future salary changes and changes in financial obligations.
Only you know your needs. All those intangibles come down to a best guess, and in most cases, you're the person best qualified to make these guesses.
For many people, it would be doe-eyed optimism to imagine that a raise would allow you to put the savings pedal to the metal in future years. But if you're still in school (or graduate school) in your 30s or even 40s, it might be realistic to plan aggressive savings for a little further down the line. The flip side can also be true: How stable is your current job? If there's any risk in your financial future, now's the time to save. Consider putting away at least 20 percent of your current salary if there's any chance that a rainy day will come sooner than expected.
Other questions to ask yourself include the likely equity of your home at retirement age, the potential for decreased spending needs if you plan to retire to an area with a lower cost of living, potential windfalls from inheritance or potential money pits, like health needs or major home repairs.
One successful planning strategy is to start with the calculators listed on the previous page and then adjust their savings recommendations for your very personalized needs. With a secure job earning a yearly 4 percent raise, you might not need to adjust the recommendations at all. But if that's not your situation, use your head. Be realistic. And if you aren't confident in your ability to do this, it might be a good idea to get professional help. A couple hundred bucks spent on financial planning advice now will look like a drop in the bucket of your retirement savings later.
For more tips on retirement, check out the links on the next page.
- The Dough Roller. "Are You Saving Enough for Retirement? Check Out This Rule of Thumb." Feb. 13, 2008. (Jan. 16, 2011)http://www.doughroller.net/retirement-planning/are-you-saving-enough-for-retirement-check-out-this-rule-of-thumb/
- Farrell, Charles J. "Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement." FPA Journal. Jan. 20, 2006. (Jan. 16, 2011)http://spwfe.fpanet.org:10005/public/Unclassified%20Records/FPA%20Journal%20January%202006%20-%20Personal%20Financial%20Ratios_%20An%20Elegant%20Road%20Map%20to%20Financial%20He.pdf
- Reeves, Scott. "Saving For Retirement At Any Age." Forbes. Sept. 28, 2004. (Jan. 16, 2011) http://www.forbes.com/2004/09/28/cx_sr_0928retirement.html
- Roth, J.D. "25 Useful Financial Rules of Thumb." GetRichSlowly. March 9, 2009. (Jan. 16, 2011)http://www.getrichslowly.org/blog/2009/03/09/25-favorite-financial-rules-of-thumb/
- Weston, Liz Pulliam. "16 favorite money rules of thumb." MSN Money. Dec. 18, 2009. (Jan. 16, 2011)http://articles.moneycentral.msn.com/SavingandDebt/Advice/16FavoriteMoneyRulesOfThumb.aspx?page=1