Saving for retirement can be a difficult and stressful journey. Why is this the case? There are a few common reasons:
- Knowing how much to save during your working years isn’t straightforward
- Meeting current financial needs typically takes a higher priority
- Investors and savers find it complicated
My own journey saving for retirement has been anything but easy. By following four simple guidelines, however, I’ve been able to reduce my anxiety and stress.
1. Start Early
Money invested for retirement at age 25 typically has twice the net benefit by age 65 compared to money invested at age 35. This illustrates how starting early can enhance your retirement savings. This is due to the compounding nature of investment returns. That’s why it’s so important to start saving as much for retirement as practical in your early years. Start saving for retirement now to take advantage of compounding.
Learn More: SEC’s Compound Interest Calculator
2. Take Advantage of Company 401(k) Matches
Have you heard the saying “there’s no such thing as a free lunch”? Well, there’s something even better — free money! If you sign up for a 401(k) or another employer-sponsored retirement plan, your company may match what you put in. This match usually caps at a certain percentage. For example, an employer might match every dollar you save with a dollar of its own, up to 5% of your salary. If that’s the case, make sure you contribute enough each year to capture the full match. It’s free money you don’t want to leave on the table.
Learn More: 3rd Decade Lead Resource: Retirement Accounts
3. Consistently Think of the Future You
As you advance in your career, you can expect your salary to increase. Try to set aside some of each increase for extra retirement savings. For example, if you get a 3% salary increase one year, consider putting 1% of it to extra retirement savings. If you get a promotion with a 10% increase, put 4% of it to extra retirement savings. The goal is to keep a balance between taking care of the current you and the future you.
4. Be Logical About Investing — Not Emotional
To reach your retirement goals, you usually need to invest in the market. This often involves stocks or stock mutual funds. Market returns can vary a lot. However, over the long run, they have usually exceeded inflation. Resist the urge to sell off investments when the market dips; that urge comes from fear, not logic. Instead, think of your investments as “set it and forget it,” even during downturns. In fact, the best investors often see downturns as a chance to buy stocks and mutual funds at a discount. Staying logical, even when feelings are strong, helps your savings grow over time.
Learn More: The Cost of Trying to Time the Market | Dimensional.
How Much Should You Actually Save?
Calculating how much to save for retirement each year can be tough. Many factors can change over time. A common rule is to save 15% of your gross income. This includes any company match. Saving at least this amount gives you the best chance at having enough money when you retire around the age of 67 to continue living a similar lifestyle. Another common rule is to aim for a retirement savings goal that is about 10 times your final annual salary. If you want a better lifestyle in retirement or want to stop working early, you may need to save more. It is important to regularly review your retirement savings progress to know whether you are on track to meet your goals. There are free tools that can help you along the way.
Saving for retirement can be easier if you follow these habits:
- Start early
- Use free money
- Think about your future self
- Make logical choices, not emotional ones
Learn More: What Accounts Should I Consider if I Want to Save More
Note: Thank you to the anonymous volunteer financial mentor for putting together this resource for the 3rd Decade Community.
