Commons Rules Of Thumb
Similar to the general guides for how much to save, general guidelines arent personalized. But they can give you a broad sense of direction.
For instance, if youre wondering what percentage of your income should go to retirement, a general rule of thumb is to set aside 10% to 15% of your income for retirement. The amount includes your contribution and your employer match, if you receive one. However, it also assumes youre starting to save for retirement in your 20s.
There are other rules of thumb for retirement savings and investing as well. For instance, one says your age should match how much of your portfolio you invest in bonds e.g., 70% in bonds once you turn 70. Generally, bonds are less risky than stocks, so this means your portfolio will have less risk as you age.
Another is the 4% rule, which says your retirement savings should last at least 30 years if you withdraw 4% of your retirement savings the first year and 4% plus inflation going forward. But the rule assumes youre invested fifty-fifty in stocks and bonds.
Rules of thumb can be helpful starting points. But make sure you dig a little deeper and create a personalized retirement plan based on your unique situation.
Tips For Saving For Retirement
- Industry experts say that people who work with a financial advisor are twice as likely to be on track to meet their retirement goals. A financial advisor can help you understand retirement and all of its moving parts. SmartAssets free tool connects you with financial advisors in your area in five minutes. If youre ready to be matched with local advisors, get started now.
- Maximize your employers 401 match, if one is offered. As illustrated by SmartAssets 401 calculator, employer contributions can seriously boost the value of your 401 over time. For instance, if your employer will match 50% of employee contributions up to 5% of your salary, you could snag $1,250 in employer contributions if you contribute $2,500 and earn $50,000 a year.
- Consider your options. As indicated by the many contribution limits, you have numerous choices when it comes to saving for retirement. Do your research to make sure youre making the best choice for your needs. Heres a breakdown of IRAs vs. 401s.
- If youre over the age of 50, take advantage of catch-up contributions. Catch-up contributions are a great way to boost your savings, whether you got a late start or havent saved as much as youd hoped. Use SmartAssets retirement calculator to ensure youre saving enough to retire comfortably.
Find Retail And Restaurant Discounts
The neat thing about senior discounts is you dont necessarily have to be a senior citizen to get them!
Weve got a thorough list of offers in our article, 14+ Senior Discounts People Age 50 and Older Should Know About. Heres a small sampling of some deals available through AARP:
- Hearing Shop: 15% discount on listening products. Get this deal.
- LensCrafters: Get 30% off complete pair, plus savings on an eye exam. Get this deal.
- Tanger Outlets: Free coupon book with up to $1,000 in savings. Get this deal.
- The UPS Store: Save 5% on shipping and 15% off on printing, packing and other services. Get this deal.
In addition to those offers, weve got a list of 20+ Senior Restaurant Discounts that you may want to check out. Again, some of these senior discounts are available starting at age 50!
And it almost goes without saying that the best way to save money on food is to cook and eat at home as much as possible.
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Get On The Same Page As Your Spouse
Many Americans are getting married around this time of their lives. This means tying yourself to someone, both romantically and financially. The two have a way of affecting each other.
According to a from Bankrates sister site CreditCards.com, 40 percent of Americans in serious relationships have hidden a financial account, such as a credit card or a savings account, from their partner.
Twenty-eight percent of respondents said such financial infidelity is worse than physical cheating. Successfully reaching your retirement goals will depend on clear communication with your spouse on all things financial: from the budget to how much to save, and planning for what you want to do in retirement.
Contribute To A Taxable Brokerage Account
To secure a comfortable retirement solely with IRA contributions, you likely have to start saving in your early 20s because of those low contribution limits. If you’ve already seen your 25th birthday come and go, that’s obviously not an option.
Instead, you can supplement your IRA savings with deposits to a taxable brokerage account. Look to save 15% of your income across the two accounts.
You will have to manage your tax burden as your brokerage account grows. Dividends, interest, realized gains, and capital gains distributions from mutual funds are taxable annually. You can manage your tax bill proactively by investing in tax-efficient mutual funds and buy-and-hold stocks that do not pay dividends.
Your non-dividend-paying stock positions only incur taxes when you sell them and realize profits — that’s one of several good reasons to avoid impulsive trading. Invest in quality stocks that you can hold for long periods of time.
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Figure Out How Much Money You’ll Need In Retirement
Your retirement number can basically be your signal that you’ve saved enough money to comfortably last you 20 to 30 years while you’re no longer working.
To figure out how much money you need to save before you can retire, you’ll want to first estimate how much money you’ll spend each year in retirement. Consider costs like rent or mortgage payments, healthcare and long-term care costs, groceries, transportation, travel expenses and pet care .
Once you add up all your potential costs per year, you should consider approximately how much of that money you’ll be receiving through federal benefits like Social Security. The Social Security Administration has an online benefits calculator that lets you estimate how much you might receive in social security based on your income now and when you hope to retire. Then, subtract your Social Security amount from your expected yearly expenses. Let’s say you calculate your yearly expenses to be $45,000 and you expect $20,000 from Social Security each year $45,000 minus $20,000 gives you $25,000 .
Then you’ll just multiply that out-of-pocket amount by 25 . The number you get is the amount of money you should aim to save before you retire. In this case, $25,000 times 25 gives you a target of $625,000.
Heres How To Save Money In Retirement
Before you can understand how to save money in retirement, its first important to grasp how people tend to spend money in retirement.
The Employee Benefit Research Institute crunched the numbers using data for people ages 65 to 74. They found housing takes up 43.9% of the average retirees budget. Next up is entertainment at 13.4% followed by transportation at 11.9%.
Dropping down to the single digits, food is 9.0% of the budget, with health care , gifts and contributions and clothing rounding things out.
Now that you have an idea of how most people are generally spending their money in retirement, here show to save money in these areas.
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Remember Your Workplace Helps Too
Saving £355 every month from the age of 22 or £690 a month from the age of 40 just to retire on a moderate income at age 65 can sound very challenging. And for many people, it will be.
However, don’t forget that not all of that monthly sum needs to come from you.
Employers are now obliged to contribute the equivalent of at least three per cent of your salary into your pension, while workers must pay in five per cent.
Some employers are even more generous. For example, if you are saving £355 a month into your pension, and that sum amounts to the minimum permitted contribution of eight per cent of your income, £133 of that will be coming from your employer and you will only have to pay the remaining £222.
So it always pays to save into a company pension if you can.
Sarah Pennells, consumer finance specialist at Royal London, says: ‘If you’re in a workplace pension, there may be ways you can pay a bit more into it.
‘For example, a number of employers will match employees’ pension contributions beyond the minimum they have to pay in under automatic enrolment rules, up to a certain limit.
‘That means that when you pay extra into your pension, your employer will pay in as well. If you get paid a bonus, you may be able to exchange some or all of it for contributions into your pension.’
Don’t Take On More Risk
Some people make the mistake of taking on additional investment risk to make up for the lost time. The potential returns are higher: Rather than 7%, there’s a chance that your investments can grow by 10% or 12%.
But the risk, the potential for loss to your principal, is also much higher. Your risk should always be aligned with your age. People in their 20s can accept greater losses, since they have much more time in which to recover. People in their 40s can accept less risk, and people in their 50s still less.
Don’t accept extra risk in your portfolio. You might consider one of the following asset allocation formulas:
- Invest a percentage of 120 minus your age, in stock funds, with the rest going into bond funds. This represents a high but acceptable level of risk.
- Invest a percentage of 110, minus your age in stock funds, with the rest in bond funds. This comes with a more moderatelevel of risk.
- Invest a percentage equivalent to your age, in bond funds, with the rest going into stock funds. This is a more conservative level of risk.
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Roth And Traditional Iras
Both Roth IRAs and Traditional IRAs let your earnings grow tax-deferred until you start making withdrawals. Youll need to determine which is best for you or maybe a combination of both. And as you near retirement, you can make catch-up contributions to your retirement savings to jump-start a stalled plan.
What If You Don’t Have Enough
Some people don’t want to do any calculating, because they are afraid of the answer. That is the ostrich approach. Don’t do that! It is far less stressful to do the math, face reality, and figure out an answer. Understanding your unique situation will allow you to prepare and adapt more easily than if you try to ignore it.
If you run through the calculations and think you don’t have enough to retire, you can explore many options, such as working a bit longer, finding ways to earn additional money, finding ways to reduce expenses, or moving to a lower-cost area. All of these actions can help bring retirement within reach.
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Figure Out How Much You Need And Set Goals
Perhaps the biggest roadblock to being able to save for retirement is not knowing exactly how much you need for a secure retirement. The majority of Americans do not have a retirement plan and they do not know how much is required to retire comfortably.
Research has found that those who have written goals and a written plan for achieving those goals are 1.21.4 more likely to succeed. Other studies have shown that having a plan can double your savings rate.
Seems like it may be worth your while to take a minute to find out for yourself exactly how much you need for retirement and create a detailed retirement plan. The NewRetirement Retirement Planner makes it easy.
Start by entering basic information and get some initial feedback on where you stand. Then, add more detail and more accurately estimate how much you need. Best of all, you can try an infinite number of scenarios. Forbes Magazine calls the platform A new approach to retirement planning and it was named a best retirement calculator by the American Association of Individual Investors and CanIRetireYet.
It is easy to use but is designed to help you imagine your future and take the steps you need to take to make that future happy and secure.
What Kind Of Retirement Do I Want
Do you want a quiet life at home or do you want to travel? Do you want to live in the same city you worked in, or do you want to retire to the country? Do you want to retire at age 65, earlier or later? And does your ideal retirement include any part-time work, or do you want to stop working entirely?
For our purposes, lets assume you want to retire at or around age 65, living the life to which youve become accustomed in other words, the same location and standard of living as during your working years. But well check back in with some of these questions later.
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Use A Retirement Income Calculator
A Retirement Income Calculator can help you estimate how much you need to save in total to generate the annual income youve calculated above, based on how well your investments perform and your expected length of retirement.
If we assume a moderate investment return averaging 4% annually, Joe and Jane will need TFSA savings of about $475,000 at age 65 if they want to generate an annual tax-free income of about $30,500 for 25 years .
Plugging the numbers into our retirement income calculator, we see that Joe and Jane need a significantly larger retirement next egg $610,000 instead of $475,000 to generate a before tax income of $39,000 from their RRSP for 25 years .
Obviously, if they want to retire earlier than age 65 theyll need more savings, and if they plan to keep working past age 65, theyll need less in savings.
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.
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Make Savings A Priority
Keep your eye on your dreams. Do the best you can to get to at least 15%. Of course, it may not be possible to hit that target every year. You may have more pressing financial demandschildren, parents, a leaky roof, a lost job, or other needs. But try not to forget about your futuremake your retirement a priority too.
How Much Should I Be Saving
If you want some general guidelines for how much you should have in your 401k and other retirement accounts, financial advisers and institutions sometimes share recommendations. The figures are often based on your annual income and age.
These general recommendations often arent as useful as a retirement calculator. Calculators can help you figure out how much you should save each month to meet your retirement goals. Or, if youre short, how that will impact your retirement years. And the more advanced calculators can incorporate your personal circumstances to create more accurate predictions.
Consider how someone who goes straight from college to medical school may graduate in their late 20s with six figures of debt rather than much retirement savings. It might look like theyre off track based on general recommendations. But theyre also in a position to land a high-paying job that lets them catch up on their savings.
Or, someone might have a lot in retirement savings but also be drowning in high-interest credit card debt. It might appear like theyre on track at first glance. But a closer look at their finances may reveal their net worth is dropping as the interest accrues.
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Consider Staying In The Workforce For At Least One More Year
Sometimes, it literally pays to delay retirement by a few years. According to Kiplinger, for every year past your full retirement age of 67 that you remain in the workforce, Social Security tacks on an additional 8% in delayed-retirement credits until you hit age 70. In other words, the longer you wait to retire, the higher your Social Security payments will be.
Plus, working a little longer means you’ll be able to save and invest little more money for when you do decide to retire.
Save Big On Vacations And Stash The Extra
Do you take a vacation every year? Those trips can really add up fast. But what if you could visit all of the cities that you love and spend half of the amount youd budgeted for? Some bed and breakfasts are most expensive than a hotel. But not AirBnB.
This service matches home or vacation homeowners with people who want a getaway. And the prices are significantly less expensive, so you can carve your budget down. When you carve your budget down, you know what to do from there.
Many families budget for vacation months or longer in advance. So, if you travel the thrifty way , take the remainder of your budget and put it into your retirement.
And if you like AirBnB enough and have an extra room or two in your home, you could become an AirBnB host and let your home pay for your next vacation.