When it comes to saving for retirement, there are a few different rules of thumb that help you figure out if you are saving enough. While rules of thumb can be a great starting point to check if you are on the right track, they are not personalized to your unique situation, so keep that in mind. However, to get a better mental grasp on your finances before seeing a financial advisor, we’ll walk you through some common rules of thumb for saving for your retirement.
Rule Of Thumb: Save 10-15% Of Your Income
The first rule of thumb in retirement savings is to save 10-15% of your income. That also includes anything your employer matches. So, when you are evaluating a job, consider if your employer is going to help you on your retirement journey. A big caveat about that rule of thumb is it’s based on a person starting their retirement savings in their 20s or 30s. If you are getting started saving for retirement in your 40s or 50s, you probably need to save 30-40% of your income to make up for the years when you weren’t thinking about retirement.
So, a tip for all of you young people out there: Do your older self a favor and start saving—even if it’s just a little bit. On the other hand, there’s no such thing as being “too late” to start your retirement savings. The best way to save money is, well, start saving!
Rule Of Thumb: The 4% Rule
Another rule of thumb that can help you figure out how much you need to save for retirement is the 4% rule. The idea behind this rule is that when you retire, you should be able to take out 4% of your investment portfolio that first year and be fairly confident that you won’t outlive your money. So, if you have $1M saved at retirement, you should be able to take out $40,000 during your first retirement year.
After the first year, you adjust your annual distributions to keep pace with inflation.
The problem is knowing that you need $1M and getting $1M saved are two very different things. Plus, it doesn’t account for other means of savings like pensions and Social Security. That’s where this rule of thumb doesn’t help you very much. This is where a good, comprehensive financial plan comes into place. It can help you answer the question of how much you truly need, and your financial advisor can teach you how to achieve that goal.
Rule Of Thumb: The 4 Levers
When thinking about how much to save for retirement, it is helpful to consider the different “levers” you have available to pull. There are four big things you can adjust for a retirement plan:
- When you retire
- How much you need and want to spend during retirement
- How hard your money works for you
- How much you save
When you retire will determine how long you need your money to last. The average life expectancy for Americans is in the 80s. If you retire in your 50s, your money must last 30+ years. So, the earlier you retire, the more money you need to have stockpiled.
When it comes to how much you want to spend during retirement, think about the lifestyle you want to maintain. Using your current spending habits as a base is often a good place to start, but you’ll also have to account for future challenges and expenses.
Next is how hard your money works for you. If you have your money parked in cash because it feels “safe”, your money isn’t growing. In fact, it’s probably losing ground to inflation. So, get your money invested in something that is going to grow for you. A financial advisor can help you develop a portfolio that balances the risk you’re willing to take with the amount that you want your money to grow.
Finally, when thinking about how much you save, make sure to consider your other resources. Are you one of the lucky people who still has a pension at work? Did you inherit money from a rich uncle? Do you already have some money saved? Will you be downsizing your house or car? Have you factored in Social Security? Make sure to account for all of your savings, not just your retirement accounts.
To get the retirement you want, you may have to pull all of those levers in different ways. Ultimately, YOU are the only one who can decide which lever you are willing to pull. Some people are willing to save more so they can retire sooner, while others are willing to work longer.
3FG Wealth: Are You Ready to Reach Beyond the Rules of Thumb?
These rules of thumb are helpful to jumpstart your retirement savings journey. However, the complexities of personal finances make it essential to tailor a plan that is made specifically for you and your financial goals. Speaking with a financial advisor is the only way to ensure that your retirement strategy is right for YOU.
At 3FG Wealth, we understand the importance of a personalized approach. We’re ready to guide you through the process so you can live the retirement you worked so hard for. Connect with us, and we’ll help you craft a plan that meets your financial goals and aligns with your life’s ambitions. Your path to the retirement you deserve starts here.
COD00000225/May 2024
