How Much Should You Save In Your Retirement Plan at Work?

 In Expectations, Fees, Financial Planning, Forecasts, Future, Goals, Happiness, Investments, Motivation, Retirees, Retirement, Social Security

I get this question all the time!  Many in the middle class or just getting starting saving for their future have difficulty in determining the right amount.  Here are some considerations which may help you figure out how much you should save:

1)  For starters, can you save at all!  I would suggest considering the following three issues:

  • Do you earn more than you spend?  Seriously.  If you are not sure about this or don’t know, you need to answer this question.  If you aren’t making more than you spend, saving money is not wise.
  • Do you have an emergency funds?  It is important to have access to some funds in the event you end up in a bind.  You can determine the amount you need.  Even if it is not a big amount, something is better than nothing.
  • Finally, do you have consumer debt that is expensive.  If you have debt that with an interest rate greater than 6% to 7%, I would definitely consider paying that off before saving.  Debt can be very costly and if you can eliminate it or make it manageable, that will clear up your budget so you can save for your future.

2)  Does your employer provide a match?  If your employer is providing a match to your retirement plan, try and take full advantage of it.  For example, let’s say they match what you put in at $.50 on each dollar you contribute up to 6% of your salary.  If you put in 6%, you would get another 3% from your employer.  In this example, you would definitely try and do the 6%.  Maximize your employer match.

3)  Evaluate the fees and options in your retirement plan.  If your retirement plan is expensive, and many of them are, you may be able to save for your own future pre-tax using an IRA.  (This is for any savings above the employer match).  You can save up to $5,500 a year if you are 49 or under and $6,500 a year if you are 50 or over.  You can make regular contributions directly from a savings account using Vanguard, which is a great option, at a very, very low cost.   You have to be careful, though, if you participate in an employer based retirement plan and do an IRA.  If you make too much money, you may not be able to do both.  The limits vary for individuals and couples, your tax filing status, and also depend upon whether or not you want to do a pre-tax or Roth IRA.

4)  Consider how important your retirement is to you!  This is a very important step.  If you are young, but already know that you want to retire early, which could mean 50 or 55 or 60, depending upon your plans, then you will definitely need to be a great saver.  You may need to save 20% to 30% of your income in your plan.  If you are older but still have ambitions to retire early or at a conventional age – mid to late 60’s – you may need to catch up and also target around 20% to 25%.

5)  Consider what sacrifices you currently want to make.  Any money that you save in your employer plan for your future is money that you could otherwise do something with today.  This is a classic trade-off and is tied in closely with prioritizing your retirement.  The real question you have to ask is “How much can I save in my plan without DRAMATICALLY altering my lifestyle?”  If you are ok with dramatically altering your lifestyle, many people do this and are glad they did, then plunge in with 15%, 20%, 25% – whatever you can do.  The more you save the more you will have for retirement.  On the other hand, if you are not okay with dramatically altering your lifestyle, find an amount that allows you to spend the money you want and enjoy your life now while still looking forward to your future.  This could be 5%, or 8%, 12%, or something else.  Run the numbers to see what works best.

6)  Keep in mind that there is no RIGHT AMOUNT to save.   Always remember this!  We are all different with unique goals, values, and experiences.  It is likely that you will never regret saving in your employer’s plan (even though you may wonder what you are doing during a market or financial calamity) and the more you save for your future, well, the more you will have in your future.

How did you decide how much to save?  Did you have to change your lifestyle much to do it?

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