One question I seem to be asked over and over again is “how much of my income should I be saving for retirement?”. This is a question that has generated numerous articles online, in magazines and newspapers, on-air segments on CNBC, and even some radio shows. There are many, many different opinions and answers to this particular question, including several standard, rule-of-thumb type answers. One side note, I typically do not like rules-of-thumb since very rarely in retirement or financial planning will a one-size-fits-all approach work. If you really think about it, we are all unique. Each one of us has different like, dislikes, desires, goals, things we view as being priorities, etc.; however, we each have our own unique retirement savings goal. There was a financial services company a few years back that launched an ad campaign highlighting everyone’s unique “retirement savings number.” I thought the ads were very well done and helped drive home the point that retirement can appear very different depending on the individual.
The first thing I want to mention should be very obvious to anyone. If the company you work for has a retirement plan that provides a match of your contributions, you should always contribute the maximum your company will match. The reason for this is abundantly clear. If you do not contribute to the maximum match, you are leaving “free money” from your employer, for your retirement, on the table. I am going to assume that most people are doing that much. If not, start immediately.
Assuming you are doing that, the next question is – should I contribute above the company match? Unless your company has an extremely generous match, and if they do, let me know who you work for, I believe you will likely still need to contribute additional monies for retirement. The company I work for encourages clients to save at least 10% of their salary in retirement accounts. Saving this money in an employer-sponsored retirement account (401k, 403b, 457b, and the Roth versions of those accounts if your company has those options) is where most people choose to save for retirement. If you participate in a traditional 401k, 403b, or 457b, the amount you contribute comes out pre-tax. I am sure many of you already know this, but if you don’t, that is a huge advantage for savers (no matter what some commercials on talk radio will tell you). Here is the reason why-part of the money that goes in to your retirement account would have gone to Uncle Sam in the way of taxes if it had not come out of your paycheck as a pre-tax deduction. In other words, if you did not participate in the plan, you would not see your paycheck increase by as much as your contribution. Again, that money would have to run through Uncle Sam’s hand first, and he has a pretty strong grip and always gets his portion.
Dave Ramsey, a best-selling author, business owner, and TV and radio host suggests that individuals save 15% of their income for retirement after you have paid off all debts except the house. I have read other articles suggesting numbers from 8% – 20%. So what do you do? Remember what I said earlier in this post? Your situation is unique. I have met with some younger workers that could reach their retirement savings goal by putting aside less than 10%. I have met with some workers in their 40s who were just getting started and needed to set aside over 20% of their income if they were going to retire in the next 25 – 30 years.
Here is my suggestion: I would do a little homework, a little research, some in-depth thinking about how you view your retirement, and some calculations before having an idea of what your contribution rate should be. There really is no one-size-fits-all save this exact amount and you will be able to retire in X number of years. The reason is your situation is unique and specific to your situation. What I do may not work for you and vice versa. I would look for a retirement calculator, much like the one in the link, where you can enter in your specific data – i.e. how much you already have saved, how many more years you are planning to work, how long do you think you will live after retirement (yes, that is the hardest question to answer because none of us know that answer), what type of return you expect to receive from your investments, etc. If you will take the time to do a little bit or work now, you will most likely see much improved results in reaching your retirement savings goal. You can do this!