How Much Should You Save for Retirement?
We all want a secure retirement, but how many of us are saving enough to ensure a stable future?
While most people will agree about the importance of putting away money for retirement, quite a few are confused or completely in the dark about how much they need to save. Fortunately, there are some simple guidelines you can use to better understand what your financial needs will be.
If you are looking for something easy to follow, you should begin saving before the age of 30 and open up an IRA, 401K, or other retirement account where you can put away your funds. Then, use one of the following figures to determine how much to save:
1. 15% of your gross income
This method is simple and will work for most people. First, determine how much you make each year, and simply multiply that number by .15. Therefore, if you make $50,000 a year, 15% of your gross income will be $7500. Note that you should use pre-tax income figures.
2. 20% of your take-home pay
If your income situation is complex, or if you pay a high percentage of taxes, use 20% of your take home pay instead of 15% of your gross pay. Regardless of which formula you use, you should end up saving around the same amount of money.
If you began to save money in your 20s, you may be able to get away with putting away less than 15-20% of your income. On the other hand, if you began saving late (in your 40s, for example) you should raise the percentage and save a greater percentage of your income.
Next, you need to decide where to invest your money. For most people, the most sensible investments will be mutual funds and bonds. In general, you want a greater percentage of your investments to be in stocks while you are young, and then move more money to bonds as you get older and near retirement. Once you are over 50, I believe you should only have about half or your money in stocks. However, some people may be more aggressive or conservative. It all boils down to what your risk tolerance is.
When picking mutual funds, it's important to select the best rated funds. One service you can use to determine what the best funds are is Morningstar, which rates all the major mutual funds out there. One other way to invest in the stock market without much hassle is to buy something called and exchange traded fund (ETFs). You can use ETFs to invest in most of the market benchmarks, like the Dow Jones Indexes, the S&P 500, and others.
Now, if you want to get more exact numbers on how much to save, you should use a couple of the retirement calculators online. I like the retirement calculators available at Bankrate. These calculators will help you calculate everything from how much to save to life expectancy.
Roth or Traditional IRA
Many people struggle with deciding whether to invest in a Roth or Non-Roth IRA. In general, if you make a lot of money, you want to use a traditional IRA. This way, you'll be able to write off your IRA contributions and get more money back when you file your taxes. On the other hand, if your income is lower than what you think it may be once you retire, you are better off putting money in a Roth IRA.
If your employer allows you to have a 401K, you should be using that account for your retirement savings. In most cases, 401Ks will allow you to save more money compared to regular IRAs. In addition, your employer may match contributions that you make. If this is the case, you should definitely contribute enough money to your 401K each year to get the maximum matched funds from your employer.
As you can see, saving for retirment requires a lot of knowledge and planning. Don't be shy to speak with a financial advisor if your financial and tax situation is complex. A good advisor will be able to help you come up with a solid, customized plan to ensure you have a bright future.