No matter how young you are, it is never too early to start saving for retirement.
While this holds true across all age brackets, it might be difficult to discern how much you should be saving within each given month or year — and whether you are actually saving enough.
Unfortunately, there is no single answer to this question. But finding out the right answer for you specifically is relatively straightforward.
Every individual will have different factors contributing to their financial situation and retirement goals, some of which include:
- How much you currently earn.
- Your method of retirement planning. For example, which kind of investment vehicles you are using (IRA, 401(k), CDs, etc.).
- Whether you put your savings to work for you.
- What age you want to retire by.
- How you plan on living in your golden years.
This is just a sample of the variables you must weigh, not only when you start retirement planning but also throughout your entire life as you change jobs, raise a family and grow your nest egg.
Below, we touch on:
- Smart retirement savings milestones.
- How much you should try to save each month.
- How to set aside additional savings.
- Where to keep your retirement savings.
- And how to know if you are saving enough.
Retirement savings milestones
Although everyone’s financial and employment situation is different, there are a few general goals to reach when trying to achieve retirement savings milestones.
One set of milestones could possibly be having 1x your income saved for retirement by the time you reach 30 years old.
Then, try to boost that to:
- Three times your income by the time you reach 40.
- Five times your income when you hit 50.
- Seven times your income when you get to 60.
- Nine times your income when you reach 70.
- And eleven times your income when you turn 80.
Taking the 2019 median annual U.S. household income of $65,712 from the U.S. Census Bureau®, you would want this much in savings by the time you turn 30, with $197,136 in retirement savings by the time you turn 40, and so on.
This might seem beyond the means of many people, but with the right savings strategy in place, it could be much more achievable than it seems at first glance.
One thing to keep in mind: People are living longer than ever before.
Increasing longevity can take a toll on your nest egg. Unexpected emergencies can happen to anyone at any time, which can also put a dent in your savings. This means it is a good idea to stash away a little extra each month if you can afford it.
What is a good amount to save per month?
Although you are no doubt already contributing to Social Security and can expect to receive these benefits upon retiring, this monthly stipend alone might not be enough to suffice for the lifestyle you wish to achieve in your golden years.
You may also wish to set aside an additional portion of your income each paycheck and use that as retirement savings.
Ultimately, the amount of money you should save comes down to how much you will need to live on during your retirement years.
As a general rule of thumb, you should try to aim to save around 15% of your annual salary strictly for retirement. If 15% is too much, then start with a more manageable number and try to increase this amount by 1% each year until you reach that 15% threshold.
So, if you earn $50,000 for the year, 15% of this would be equal to putting aside about $7,500 in retirement savings, or around $625 a month. You do not need to limit yourself, though. If you can afford to contribute more than 15%, then that could help even more with your retirement savings.
While this amount might seem too little to use as retirement income, proper savings and investment methods will provide compound interest on your money, which can have a dramatic impact on the total.
Compound interest refers to the earned interest on money in your account, which snowballs over time. This means the earlier you begin saving, the more money your retirement fund will hold over the long term.
There are also helpful and handy online calculators that can help you figure out how long it will take to reach your savings goals. These allow you to enter various amounts for goals, income levels and contributions to help you balance your monthly spending and savings.
If you have not yet reached any of these milestones, you still have time. Everyone has their own personal circumstances, and cost of living expenses vary greatly from one location to the next.
Plus, there are plenty of ways to set aside more money for retirement savings, in addition to ensuring that the retirement savings you do have is being put to work making you more money.
How to set aside additional money for savings
Saving extra money each month might seem like an insurmountable task, but there are easy ways to ensure you are planning for your golden years.
Make a budget
If you do not have one already, create a monthly budget for yourself and your family. A dedicated monthly budget that’s strictly adhered to can help ensure that you can start saving enough money to meet your retirement goals.
Add up every bill paid, like utilities, mortgage or rent payments. Include groceries, entertainment, travel and other expenses as well.
Keep track month to month to locate spending habits and trends that can be improved.
Cut unnecessary costs
This step is a little more difficult. However, you could use your budget to identify areas where you are either overspending or where you can make small cuts to your expenses. This might come from limiting the amount you spend eating out or cutting back on vacations.
Cutting out some of these discretionary expenses, and then diverting that money to savings instead, could be an efficient way to kick-start your nest egg.
Pick up a side gig
There are lots of ways to monetize skills, hobbies and time nowadays. From opening an Etsy shop to streaming videos or driving a rideshare, consider ways to earn additional income on the side.
Using microsaving strategies
Not all contributions to your retirement savings need to be big. Every little bit could help out in the long term. For instance, you can have all your change from purchases go directly into your savings account.
Where should you keep your retirement savings?
There are many different retirement planning methods you should consider, each one with their own unique benefits.
A few of the more common types of savings and investment vehicles include:
Savings account
If you do not already have one, opening a savings account that remains separate from your regular bank account is a great first step to start saving. Keeping this money split from your daily spending money could help incentivize you to save it instead of spending it.
While interest rate returns on savings accounts can be much lower than other forms of savings methods, they still provide a good way to track and measure your retirement planning.
Individual Retirement Account (IRA)
An IRA is a smart way to save for retirement since it is a tax-favored account. These types of accounts typically serve as a “basket” that holds a variety of assets like stocks, bonds and mutual funds.
With a traditional IRA, you do not pay any taxes on contributions until you withdraw the money at retirement. This is different from a Roth IRA, where you pay the taxes when contributing to the account and avoid them when these funds are withdrawn.
However, in both types of accounts, the compounding income you earn on interest, dividends and capital gains is not subject to taxes.
If you are under 50 years old, you can make contributions without having to pay any taxes on them.
401(k)
A 401(k) is another type of tax-advantaged retirement account.
Whereas an IRA is an account you create and operate as an individual, the 401(k) differs from an IRA in that it is an employment-based retirement plan. With a 401(k), you typically make contributions through an automatic payroll withholding. In some cases, employers will match a certain percentage or all of your contributions.
A traditional 401(k) is only taxed upon withdrawal, typically at retirement. For a Roth 401(k), you contribute money with post-tax income, but you can make withdrawals tax-free.
Investments
You can also invest in the stock market, government bonds or business ventures to help boost your savings. While this method of retirement planning can carry more risks, it also has its own rewards.
Actively managing a diverse investment portfolio can provide a substantial rate of return if you have the skills and knowledge. It can be wise to speak with a financial planner or financial advisor before making any big investments.
Remember, these are not all mutually exclusive options, and many of them can be used in tandem with each other. In some instances, diversifying your retirement fund can potentially be a good way to protect against market downturns while ensuring your savings rate keeps pace with inflation and rising costs of living.
How to know if you are saving enough for retirement?
Although this article provides a solid starting point to begin your journey for retirement saving, it can also be extremely helpful to speak with a financial advisor or and use only web banking tools to monitor spending and saving.
Even if you are far from retirement age, speaking with a professional can get you started early on the right track. A financial advisor can provide the guidance you need to reach your savings milestones — and maybe even retire early.
At Comerica Bank, we offer a wide range of financial tools and wealth management assistance to help you achieve your retirement goals. Reach out to us today to learn more.
