For many, retirement seems like a faint light at the end of the tunnel. For recent college graduates in their early 20’s, it might seem like that light will never get any brighter. Fast forward several decades and that light is nearly blinding. The underlying question is if those reaching the end of the tunnel are ready for what is on the other side – retirement.
Many workers picture retirement as the opportunity of trading in a cubicle and office chair for reading a book in a lounge chair on the ocean. But, it takes years of saving and working to be able to “afford” to retire. A USA Today poll found that 58% of workers above the age of 60 are delaying their retirement because they cannot afford it. Of that 58% saying they would delay retirement, 79% said they couldn’t afford to retire. So, how much money do you need to save today to be able to retire on time?
What Do You Need To Retire On Time?
It largely depends on your age and how much you have saved already. The sooner you start saving, the more opportunities for compound interest. The less you need to save to “catch-up.” Plus the longer saving for retirement is delayed, no amount of “catching up” will equal the savings amount as if they had started ten or twenty years before.
Some people might say a good goal is around a million dollars, as financial experts recommend saving 23 times your standard of living at the age of 65 (current retirement age). Saving this amount of money should provide you enough reserves to last 35 years past retirement. Nobody knows how long they will live or what unexpected bills they might encounter, so it’s better to have too much than too little.
Here is a table that provides a general rule of thumb. Recommended by financial advisors, this is how much a person should save from each paycheck depending on their age:
| Age When Beginning To Save For Retirement | Percent of Income To Save |
| Starting in their 20s | 10-15% |
| Starting in their 30s | 15-25% |
| Starting in their early 40s | 25-35% |
| Starting in their mid-40s | At least 35% |
To get a more accurate estimate of how much you should save monthly, try plugging numbers into a retirement calculator. Your investment brokerage or 401(k) provider should have a calculator that allows you to put in your income, anticipated retirement date, estimated monthly expenses when retired, and how many years you want your funds to last. Depending on these factors, you may have to save more of your income than the percentages recommended in the table above.
Every Little Bit Helps
Even if you cannot save the recommended amount for your age bracket, something is better than nothing. Twenty-year-olds might be thinking that they need to devote all their disposable income to repaying student loans and will start saving for retirement after that. When this same twenty-year-old turns 30, their student loans may be near completion yet they get into debt for a home loan mortgage.
It’s easy to forget about retirement because it is so far away. Banks want their money monthly for student loans and mortgages, not receiving the first payment five years from now. If a retirement account required the same monthly payment installment without a deferment period, it’s a good possibility that less than 58% of the USA Today survey respondents would be delaying retirement.
The reason that twenty-year-olds have to commit less money per paycheck than their peers that do not begin saving for retirement until later in life is because of compound interest. Albert Einstein once called it the greatest invention of all time. Compound interest pays interest on top of interest. Over a period of years or decades, the interest earned on the initial contributions can help provide for a very large nest egg.
Example of Compound Interest
While every person should be saving at least 10%, instead of 1 or 2% of their income, anything is better than nothing at all. According to the Federal Reserve, the median retirement account balance for near-retirees aged 55-64 years old is approximately $111,000. Most workers do not start hitting retirement savings with a serious amount of contributions until their 40’s. Could you live off of $111,000 for the next decade while no longer earning a regular paycheck?
Various Retirement Accounts
There are several ways that you can save for retirement. You can still have the incentives that allow you to earn retirement savings with a lower tax burden. You can also save for retirement using a taxable brokerage account. But there are two different options that only require you to pay taxes once on each contribution.
Social Security
Social Security has been around since 1935. It was first instituted to help combat poverty among senior citizens. It is only intended to help retired people receive enough money to pay for basic expenses like utilities, rent, etc. You won’t be able to afford to travel the world on a monthly Social Security check.
There is some controversy over the Social Security system as it has been experiencing budget shortfalls for several years now. While every worker and employers pay a certain percentage of each paycheck into the Social Security trust funds, it is uncertain if Gen X and millennial workers will receive full benefits (experts expect it to run out by the year 2034). At that point, Social Security will only be able to pay out what they receive each month. Recipients will have their benefit payouts reduced proportionally to the deficit unless federal reform measures are implemented.
For decades, financial advisors have been telling workers not to rely on Social Security alone for funding retirement because it only pays basic expenses. However, those retiring after 2034 will probably want to save even more money because of the long-term uncertainty pertaining to Social Security.
401(k)
Over the years, employers have shifted from defined-benefit pension plans to defined contribution 401(k) retirement plans. The shift has transferred the responsibility of retirement savings from the employer to the employee. Many employers will offer a match for a specified dollar amount that an employee contributes to their 401(k) plan.
If your employer offers a 401(k) match, you should contribute the minimum amount of money to get this “free” money. Think of it as instant “compound interest.” You had to work to earn the match as there is no such thing as a free lunch, but something is better than nothing.
Due to recent legislative changes, 401(k)s also offer a post-tax Roth variety similar to a Roth IRA. More employers are offering both types of 401(k)s. With a traditional 401(k), you need to pay an income tax on all earnings when you withdraw them during retirement. This means you might have to save even more to offset Uncle Sam’s portion of your retirement savings. A Roth 401(k) doesn’t charge a tax when distributions are made in retirement. Instead, you only pay the tax on income you earn today before the money is put in the Roth retirement account. Savings in both accounts grow tax-free in the years you are still working.
Individual Retirement Account (IRA)
Similar to a 401(k), IRAs are for people that do not have access to a 401(k) or want to save additional money for outside of a workplace retirement account. Traditional IRAs levy a tax on withdrawals during retirement. A Roth IRA is tax-free as you only pay the income tax on the money today. Along with 401(k)s, the money can only be withdrawn when you reach retirement age (except under special circumstances which usually carry stiff penalties and fees).
Start Saving Today
Just as it doesn’t take a lot of money to start investing, not a lot is required to start retiring either. The sooner you start means the less you need to save later. It also means you do not need to delay retirement. To get an accurate picture of how much you need to save, start with a retirement calculator. Consider talking with a financial advisor to help you get the highest return on your savings.
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