When it comes to retirement savings, a lot of things may be running through your head. How much should you save for retirement? Do you haaaave to save for retirement? And then reality hits, one day you’d like to stop working.
The best things in life are free, but as country singer Chris Jansen said, “Money can’t buy happiness, but it could buy me a boat.”
Retirement savings buys you the ability to not work!
And that’s pretty awesome.
But almost 70% of Americans have less than $1,000 in savings, and about half of families have nothing saved for retirement.
YIKES!
Let’s break the financial ice on retirement savings.
A long-time reader, Dave wrote in to Ask Carly for advice on retirement savings.
Ask Carly is a way for us to stay connected and support one another on our journey to gaining financial independence. You don’t need to figure this money stuff out on your own. You can submit your questions about life and money here.
You don’t need to figure this money stuff out alone.
Here’s his question:
How much do you put away for retirement/old age as a percentage of what you earn? What factors into your decision (e.g., your age, your expected return, etc.)? If you have to raid it for something unexpected (e.g., car falls apart, unexpected medical expenses, etc) what do you do? Do you double down and save more and try to refill that you would have/should have had? Or just keep going?
-Dave
Shout out to Dave for writing to Ask Carly (thanks man!) and I feel ya on dealing with life’s crazy surprises that come with a price tag. It’s tough, but you can bounce back.
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How much should you save for retirement?
The short answer is a good rule of thumb is to start investing 10% of your pay for retirement.
Here’s the long answer on how much should you save for retirement.
Take things one step at a time. I created The Ultimate Guide to Managing Money. It’s a step by step plan to investing, getting out of debt, saving for emergencies, and buying a home or car. You can get your free guide here.
To answer Dave’s questions, we’ll go over briefly this step by step plan.
Step 1: Save 10%
Automatically invest 10% of your income. This is where Dave will get back on track by automatically investing each month.
From 1928 to 2014 the average return of the S&P 500 was 9.8%, so in your projections I’d assume a more conservative estimate of a 8% return.
Step 2: Get out of debt
Having no monthly debt payments gives you freedom, so before trying to double down on retirement savings make sure to knock out any medical debt, or car loans, by paying the minimums and push to pay $300 or more extra towards your highest interest debt.
If Dave has no debt, then YAY! He’ll jump to the next step.
Step 3: Save 3- 12 months of expenses for an emergency fund
Instead of having to raid retirement, start building an emergency fund for car accidents, job loss, ER visits, etc. Have 3-12 months of expense in a liquid savings account that’s separate from retirement savings. Sound impossible to save thousands of dollars? Now that you are debt-free you can take what you were paying towards your debt and complete your emergency fund. Or if Dave’s already debt-free then push to save $300, $500, $1000 or more each month towards an emergency fund. Here’s an easy guide to emergency funds.
Step 4: Save for life purchases like buying a home or car
Hello life. Now Dave’s retirement savings is rolling again, his debt is paid in full, he’s got money in the bank for a rainy day, and now the sky’s the limit. He can now save up and have a plan for the fun things in life like buying a car, or home.
Or now this is when he can increase retirement savings and double down.
How much can you contribute?
Each year the limit increases on how much you can contribute. Currently you can invest up to $19,500 annually in your 401(k) plan, and additional “catch-up” of $6,500 for those 50 and older.
Plus, you can contribute $6,000 in a IRA, and an additional “catch-up” of $1,000.
There ya have it Dave on your question, how much should you save for retirement. In a nutshell, start investing 10% now, knock out any debt, and then build an emergency fund to prevent in the future having to use your retirement funds. Then you can go bananas on doubling down on retirement!
P.S. Got money questions?
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