Everyone should save for when they retire. That’s common sense.
But how much one should save is a bit more complicated, it seems…
So, what percentage to save for retirement? A good rule of thumb is to save at least 20% of your income. This is, of course, not a one-size-fits-all solution. For example, you might need to go lower if you have debt. The long answer also depends on your retirement goals, your age, and how you save for retirement.
In this article, I will help you determine the right percentage to save for retirement no matter the financial situation you’re in. I will also help you realize the right way to save for retirement that applies to your situation.
Sounds good? Let’s dive right into it!
How Much Should I Invest for Retirement If I Have Debt?
First and foremost, what changes if you have debt?
Well, it depends on the debt. Are we talking about a mortgage or credit card debt? Because the first is not of a great urgency and the latter is something that requires your full attention.
So, do this. If your debt has an interest rate that makes your life uncomfortable, then cut down on saving until you completely eliminate it. You might want to save 15% or even 10% for retirement until that debt has been dealt with.
If that’s still too much for you, aim even lower. No shame in that. But be careful that there is no excuse to not save anything for retirement. Even if you are drowning in debt, you should always put something aside each month.
Now, if you only have a mortgage to worry about, you should save for retirement as much as you would if you didn’t have any debt at all.
Related: Should you Pay off Debt or Invest First?
Now, leaving debt aside, we need to see what other factors will affect the ideal percentage to save for retirement…
How Do I Pinpoint the Right Amount to Save for Retirement?
OK… What else goes into the estimation of the ideal amount you will need to save for retirement?
Do you have a spouse? If so, sit down and have a chat about how you envision your lifestyle during retirement. If not, do this with yourself (psst, it’s going to be faster).
If you do this, you will be able to make a list of things you will want during retirement. For example, you may want to play golf every weekend and eat out twice a month. Write that down and estimate the yearly cost.
You may want to give a specific amount of money to charity every year. Write that number down as well.
I think you’re getting the idea. The point is to approximately determine all your yearly expenses 20 or 30 years from now.
This is obviously easier said than done, of course. You might end up needing more than you estimate by the time you retire. The only thing you can do here is simply evaluate your retirement goals every now and then. This way, you will need to periodically adjust the percentage to save for retirement.
Another important factor is age. The younger you are, the lower the amount you will have to save each month for retirement. But at the same time, you need to also consider the age you want to retire at. The further the date of your retirement’s start, the lower the amount as well.
Last but not least, consider the average rate of return you think you can get out of investing for retirement. Of course, you didn’t expect you would just move money to a bank account, did you?
The bigger that rate is, the lower the amount of money you need to save each month.
But how do I go about investing for retirement? What are my options?
Worry not. I will tell you right away…
What’s the Best Way to Save for Retirement?
If you live in the US and you’re an employee, chances are you have access to a 401(k) retirement account. More so, perhaps your employer also offers a contribution match. Try to max out your contribution limit and take full advantage of that match.
Now, if you don’t have access to such a plan, maybe you can get your hands on a Roth IRA? This is another retirement account with tax advantages that will help you achieve your retirement goals.
Of course, if you don’t live in the US or just don’t want to open a retirement account like a Roth IRA for some reason, you’re not doomed. You can still save for retirement by directly investing in a broad-market index fund.
Broad-market index funds are very conservative investment vehicles. So they’re ideal when looking to save for retirement. They are basically funds managed by professionals using a passive investment strategy.
Related: The 3 Most important Index Fund Benefits
They’re also what you will want to look for when selecting investments for your 401(k) or Roth IRA plan.
You can learn more about selecting index funds here…
Conclusion
As you can see, saving for retirement isn’t an exact science, nor should it be. There are so many factors at play that you cannot really predict with mathematical accuracy the right amount to save each month.
With that being said, a good rule of thumb is to start saving 20% of your monthly income for retirement. If you have debt, you can always go lower at 15% or even 10%.
But you should save something each month no matter your financial situation or your age. The clock is ticking… And as much as I hate making you anxious, even if you’re in your 20s, you should sit down and make a plan for your retirement.
You have one shot at retiring comfortably and at the age you want. If you apply what we discussed here, you will be well on your way to a comfortable and early retirement.
Now, did you find this article useful? If so, could you please share it by using the social media buttons below? And if you have any questions, don’t hesitate to leave a comment below and I’ll get back to you as soon as I can…
Thanks for reading and I wish you an awesome retirement!
Disclaimer: This information should not be viewed as financial advice. You should consult a financial advisor or do your own due diligence before you invest. The owner of this website and author of this article are not to be held liable for any undesired result by anyone who uses this information that is provided here in any way.
