If you're asking that question, you're already on the right track because you're saving. Step Two: figuring out how much to invest.
Knowing that you have to save for retirement is easy. Knowing just how much to carve out of your budget each month for your retirement account? Not so easy. To help you with that, here's some sound investing advice that can carry you through thick and thin, for the rest of your working life.
How About Setting Goals?
You can set goals based on how much you're going to need in retirement. But most adults (especially young adults who are decades away from retiring) find it hard to pin down an exact figure: 75% of your current salary? 85%? What will things even cost in the future? Will Social Security even be around?
Your goal should be to have enough money in your retirement account to support you in the future. You should also aim to have the financial flexibility so when you don’t want to work in the future, you don’t have too.
The Good Old 401(k) Rule
If you make a habit of reading about personal finance, you probably already know that the 401(k) is a great invention and that you should be participating. The good old 401(k) rule is to contribute at least enough to max out the company match. That's usually around 6%. Those matching funds represent free money for you, after all.
Although I agree with that general wisdom, I'd like to challenge you to push harder and go farther. I want you to go way beyond that minimum amount to reach a company match. I say start with setting aside a full 20% of your income and putting it into a retirement account.
Push Hard to Save More: Reason #1
Some people set their goals low. While it's good they're saving at all, and that puts them in a stronger category when compared to their non-saving peers, let's see what pushing harder can do for you.
First, here's a snapshot of what investing 6% will do for you over the years. If you're in your 20's right now, we'll say you have 40 years to invest and for your nest egg to grow. We'll figure a 6% annual rate of return on your investments, which is the best we can do to calculate the averages over the decades.
As you can see, investing 6% of your $65,000 salary gets you close to a million dollars by the time you're ready to retire. Not bad.
But look what happens when you push harder to save more and manage to save 20% of your $65,000 income...
Whoa! Now your nest egg is quite sizable: clocking in at just over $2.75 million. It's just under triple the amount you'd have if you'd only been investing 6% all those years.
Now I know you are saying to yourself there is no way I could save 20% of my salary? Well why not? Give it shot now and see how it goes.
Thanks go to Bankrate for their handy calculator, by the way.
Reason #2 for Pushing Hard to Save More
Besides the obvious reason that saving more for retirement means you'll have a fatter nest egg, there's a lot more behind the logic for pushing harder to save more.
People who get into the habit of squirreling away 20% of their income every year are also teaching themselves very valuable lessons about living and budgeting. This goes double for anyone in their 20s or even their 30s: once you get into the habit of living on less, you won't even realize it. And the long term difference is staggering, as you just saw.
When you're only 26, it's probably hard to keep your hands off a fifth of your salary so you can retire in comfort. Retirement is, after all, half a lifetime away. Just keep in mind that as the years start to roll on by you, you will feel it's the smart thing to do.
Bottom line, the more you put away now, the closer you are to attaining financial freedom and deciding for yourself when you stop working.
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