When it comes to saving for retirement, the earlier you start, the better off you will be. However, it’s never too late to start preparing for your golden years.
The best way to prepare for retirement is to start planning and acting today, especially if you are in your 20s, 30s or 40s. In this beginner’s guide to retirement, you will find steps to help you plan for retirement savings.
How to plan for retirement
The decisions you make today will determine when and how comfortably you will live in retirement. Use the tips below to understand ways to prepare for your financial future.
1. When can you retire?
There are several factors to consider when thinking about your retirement timeline, including:
- Age you want to retire
- How long it will take to save up for retirement
- How many years you can live off your retirement savings
- How long you can keep up with the demands of your job
In addition, social security benefits (if you qualify) can also be a determining factor in your retirement age. The longer you wait to claim your benefits and the more you earn during your career, the more you can claim after retirement.
For example, you can start claiming benefits at 62, but you will only receive 80% of the benefits you qualify for. If you instead wait until your 67th birthday, you will receive 100% of your benefits during your retirement.
Use these factors to help you estimate how early you can retire and how to reach that goal.
2. How much do I need to retire?
The amount of your total retirement fund should be based on the lifestyle you expect to live, and the amount needed to sustain it.
For example, while one person can live modestly on one amount for 30 years, that same amount may only support a more extravagant lifestyle for 15 years.
A recent NerdWallet article recommends planning to replace 70-90% of your annual income before retirement with Social Security benefits and savings. If you make $60,000 at the time of retirement per year, for example, you will need about $42,000 to $54,000 for every year of your retirement to cover the expenses of your current lifestyle.
Using the retirement timeline you determined in the first step, calculate how much you can start investing and saving today to achieve your ideal retirement amount.
3. When should I start saving for retirement?
CNBC recommends starting as early as you can, even if that means putting a small amount into your 401(k) during your 20s. However, if you’re older than your 20s, it’s never too late to start.
The sooner you start saving, the faster your money can grow. Let’s say, for example, you want to retire at 67. If you invest $20,000 at the age of 27 and contribute $100 to this investment every month with a return rate of 6%, you will have over $396,000 saved by age 67. However, if you make the same investment when you’re 47, you will just have over $109,000 by 67.
While your immediate needs should be prioritized, you should also find ways to put some funds aside for your future. Creating a budget to cut back on unnecessary expenses and even finding a side job can help contribute to your retirement account.
4. How should a beginner save for retirement?
While saving your money is essential, U.S. News also suggests several additional ways that you can maximize your retirement amount, including:
- Saving 1% more - If you increase the amount you invest by 1% of your annual salary every year, you can increase your savings without drastically affecting your budget.
- Investing raises or any unexpected money - if you invest any additional income you can add to your retirement fund without taking more from your income
- Automating savings - Set up automatic deposits to your retirement accounts so you don’t forget to save
Timing is the most important part of saving for retirement. Follow these tips to start investing in your future today.