Saving for retirement might feel like a pipe dream when the economy is tanking and you’re not even sure you will have a job to retire from by tomorrow. However, you should always have a plan for the future. The plan will change as your circumstances change, but that’s not an excuse to do nothing. You are neither too young nor too old to start or increase savings to fund a comfortable retirement.
If you are unemployed, your first goal, of course, will be to find another job. In that case, have a savings plan ready to implement when you do start working again.
How Much is Enough in Retirement
Experts make varying assertions about how much income you will need in retirement. Their advice can range from 70% of pre-retirement income to 100% or more. Those recommending a higher retirement income are usually assuming that your medical expenses will rise sharply as you get older.
Those assumptions are key. The experts’ suppositions may or may not apply to your unique situation. You have to make your own judgments and adjustments based on your life, your health and any plans you have for retirement.
Some topics to consider when evaluating the size of the nest egg you will need:
- Length of retirement: Experts often assume either a 20- or 30-year retirement. If you know your family tends to live significantly longer or shorter lives than average, you may want to adjust your calculations accordingly. Likewise, the age at which you plan to retire will affect your anticipated length of retirement.
- How much income will Social Security provide?: The Social Security Administration (SSA) claims that benefits for most retirees will be about 40% of pre-retirement income. Many experts prefer to assume 25%, and many young people don’t expect to receive any benefits by the time they retire. The SSA sends out annual statements that provide an estimate of your monthly retirement benefit, so you can base your percentages on that.
- How comfortable are you with the odds?: You will rarely find a scenario where you are 100% guaranteed your money will last the rest of your life. You need to decide at what confidence level you are comfortable with your chances. The more security you need, the larger the nest egg you need.
- Do you plan to continue working during retirement?: Laws have changed so that once you reach full retirement age, you can work without reducing your Social Security benefits. This is a good way to stretch your savings.
- What returns do you expect?: Many retirement calculators pre-populate the returns box with either 8% or 10%. But your returns will depend on your investment mix, and if you are not getting those returns now, you can’t expect them down the road. It’s safer to assume a lower return, say 4%-6%, to give yourself a cushion in case of prolonged market downturns.
Are You on Track to Save Enough?
There are many calculators available to help you plan your retirement, from how much you need to save today to whether or not you are currently on track. CNN Money’s Retirement Planner is quite comprehensive and allows you to plug in different assumptions for both you and your spouse. The SSA website provides a Benefits Planner with calculators for various scenarios, and Choose to Save offers links to multiple Retirement and Savings calculators.
Try different calculators, as they tend to provide slightly different results. You will need to enter information about your current situation and the assumptions you’ve made about the future. Run different scenarios with different assumptions about pre-retirement income, annual returns and inflation, both optimistic and gloomy. The truth will be somewhere in the middle, but if even the gloomy scenarios suggest you are on track, then you are in good shape. Alternatively, if even the rosy scenarios suggest you are falling far short of your goals, then you will need to make some changes.
How to Save More for Retirement
- Start small: As long as you are working, you can afford to save for retirement. Even if you can only save $10 per month, put that amount in a savings account each month until you have enough to open an IRA. Many banks will allow you to open an IRA with only $100, and you can start with a simple Money Market Account until you become more comfortable with investing.
- Make it automatic: If your employer offers a 401(k) or similar employer-sponsored plan, participate. You can designate a percentage of each paycheck or a set dollar amount to go straight into this account. You won’t miss money you don’t see, and these plans have no minimum opening amount and no minimum monthly contribution. Your money starts earning for you immediately.
- Let your employer help: If your employer offers matching funds for contributing to 401(k), invest enough to get the full match, if possible. If you’ve heard this before but thought that 3% isn’t enough to matter, think again. It’s free money and over time it adds up. If, for example, you make $24,000 and your employer matches your contributions dollar for dollar up to 3%, that’s $720. Added to the $720 you put in, that’s $1,440. You’ve doubled your money with zero effort. Do this every year, and in 10 years you will have $14,400, not including interest earned.
- Pay off debt: Not only does paying off debt give you peace of mind, but since you’ve been living without that money already, you won’t miss it if you put some of it into retirement savings. If possible, save at least half and use the remainder to pay off other debts. This way, you both increase retirement savings and speed up debt settlement. As you pay off more debt, you’ll have even more to put toward retirement. If it’s been a struggle to live without the money, split it into thirds and put one-third toward retirement savings and one-third toward additional debt, leaving you with the remaining third for daily living.
- Save your raise: Just like the money you are using to pay off debt, you have been living without the money you will get from a raise. Divert some into retirement savings before you have a chance to miss it. If you are already putting a percentage of each check into a 401(k), the increased savings will happen automatically. If not, then increase the dollar amount you are contributing, or the amount you add to your IRA. Remember, small amounts out of each paycheck add up over the year. An extra $15 out of each bi-weekly check becomes an extra $390 for the year.
You’ll notice that these tips involve mostly small sacrifices made consistently over time. Regular investment is more important than the size of the investment. Even if the amount you can save today is not enough to reach your retirement goals, it will get you closer to that goal than doing nothing. Your intermediate goal should then be to increase the amount you can save each year until you are on track for that comfortable retirement.