Let me ask you a question: as of right now, do you have enough saved for retirement? Most of us (myself included) will probably say no to that question.
And that’s perfectly fine! Most of us probably don’t need to retire tomorrow. In fact, we may not even want to retire tomorrow – or any time soon, for that matter.
But here’s the thing: the earlier you save, and the more you save, the better. That’s due to compounding plus the general upward trend of the stock market.
I have talked about investing here before. Technically, saving and investing are not exactly the same thing. For example, a savings account is not an investment.
Generally, though, retirement accounts (such as those sponsored by your employer) will actually be investment accounts. So, there is a lot of overlap between these two terms.
“The best time to invest is 20 years ago. The second best time is today.”
This is another nugget of wisdom that I gleaned from a ChooseFI podcast (although I think he was quoting someone else). Either way, it couldn’t be more true.
After all, the stock market has grown roughly tenfold since 100 years ago. And while there have been ups and downs in that time span, the overall trend has been that of consistent growth.
We can’t control the past. But we can control the present.
Yes, your results may have been better if you started investing five, ten, or fifteen years ago…but something is always better than nothing.
Maybe you don’t have much saved for retirement. Maybe you have nothing saved at all. But even if one of those is true, you should never think that it’s too late to start. Other than extremely short periods of time, that is almost never true.
Great, but how much should I have in retirement savings?
That is the logical next question in this discussion, and luckily, it has already been closely examined numerous times.
As is always the case with personal finance, your individual circumstances could certainly change the savings numbers that are best for you.
Still, having a rule of thumb is much better than just knowing you need to save “money.”
Many articles, such as this one from Investopedia, give us some real, tangible figures. They give two different savings trajectories, but I prefer the latter since it includes more milestones:
- Age 30 – one times annual salary
- Age 35 – two times annual salary
- Age 40 – three times annual salary
- Age 45 – four times annual salary
- Age 50 – five times annual salary
- Age 55 – six times annual salary
- Age 60 – seven times annual salary
- Age 65 – eight times annual salary
I also like this breakdown because it’s very simple – every 5 years, you simply add another year’s salary.
Full disclosure: currently 30 years old, I don’t have as much as these numbers recommend. But hey – I’m working on it.
And again, YMMV with this. But having concrete numbers such as these is valuable because it gives us a starting point. Start with figures like these, and adjust them based upon your individual circumstances.
What are your goals?
Having your goals as clearly defined as possible will be the biggest factor in how your retirement plan will vary. Do you want to retire early? Do you want to work until retirement, but be financially independent before then?
Some of these scenarios could make your savings plan differ greatly from the above scale. Because everyone’s situation is a little bit different, it may be wise to sit down with a financial planner to hash out all the specifics.
The bottom line
When deciding how much to save, there will be many variables. For instance:
- At what age do you want to retire?
- What percentage of your current income would you like to have in retirement?
- What percentage of current income will you have to save in order to reach that goal?
While it can seem daunting at first, you can (and probably should) automate your contributions so that you won’t even have to think about them. Typically, the less human factor there is, the better.
So, even if it seems complicated, retirement savings are an absolute must for nearly all of us. If you have been putting it off, for one reason or another, just remember that there will never be a better time than today to start saving!