How much you need to save in order to retire
Bob Powell, editor at Retirement Daily, joins TheStreet to explain how much you ned to have saved in order to retire.
Category
🥇
SportsTranscript
00:00What are the big issues facing retirement savings and retirees?
00:06Like, what are the things that the collective we should be talking about, but we're not talking about?
00:12Yeah, I think the very first thing that at least people, I think, get wrong about retirement
00:16is the need to start saving as early as possible.
00:20The longer you wait, the less you'll be able to take advantage of the power of compounding,
00:26and the more you'll have to save later in life.
00:28When you enter the workforce, you should shoot to save at least 15% of your income,
00:34and then you should try to hit certain benchmarks as you go through your work life.
00:38So at age 35, for instance, you should have maybe 1 to 1.5 times your salary saved in your 401k or your IRA,
00:46and that by the time you hit 65, you should have somewhere between 7.5 and 13.5 times your salary saved for retirement.
00:54Think about starting early and then think about setting these goals for yourself as you hit certain ages.
01:00And how do we scale up as we age?
01:04In terms of scaling up, I would think about it this way.
01:07So I mentioned the benchmarks.
01:08One of the things that you need to also consider is if you're behind the eighth wall in terms of your savings,
01:14you really need to think about, well, maybe I need to save more than 15%.
01:18So for instance, I'll give you a worst case example.
01:21Let's say you are age 60 and you haven't saved a nickel for retirement.
01:27Well, at that point, when you hit age 60, you're going to need to save at least 33% of your income
01:32to make up for what you didn't save when you were 20, 30, and 40 years old.
01:37On the other hand, if you start saving when you're in your 30s,
01:40you will be able to sort of save at a moderate percentage that allows you to, one, fully fund your retirement,
01:47but also be able to enjoy the things in life that you want to, a vacation here and there, saving for college,
01:54paying down student loans, buying a house, buying a second home, et cetera, et cetera.
01:59So it really is a matter of, I think, you know, one of the things I like to say is,
02:04you know, everyone should go back and reread the Aesop's Fable of the Ant and the Grasshopper.
02:10The ant set aside food for the winter months when there would be no food,
02:14and the grasshopper didn't and went begging the ant for food during the winter months.
02:19We need to be more like ants than grasshoppers as you think about sort of, you know,
02:23how I can save for retirement, but also how I can enjoy life.
02:27I guess a gradual approach takes the sting out of actually setting the money aside, yeah?
02:34Yeah, for sure. I mean, again, you might not be able to save 15% of your salary in year one,
02:40but you might be able to save 6%, and then assuming that your employer matches up to half of that,
02:45so you'd be saving at a rate of 9%, which is a really good starting place for many people
02:49who might be in their 20s and who might be, one, trying to pay down their student loans,
02:53trying to enjoy life if they're living in whatever, New York City or Boston or wherever they might be.
02:58And then what you would do is you want to set your 401k plan on something called auto-escalation.
03:04So every year it would escalate from, say, 6% to 7%, 7% to 8%.
03:09And those escalations would be painless in part because with hope you've had a salary increase,
03:14and that one percentage increase in your salary deferral rate won't put a big dent in your sort of standard of living.
03:21So I think that's one thing to consider is auto-escalation.
03:24And also, if you can afford it, every time you do get a pay raise, reevaluate how much you're saving.
03:28Maybe you'd be able to save, maybe save from 6% to 8% or from, say, 8% to 10%.
03:35So, you know, be mindful about the money that's coming in and how you're allocating it
03:39between savings and enjoyment and essential expenses.