Saving money doesn’t often seem like a priority when we’re in our early twenties, or even in our early thirties. In fact, 42% of those under 34 in the US haven’t started saving for retirement. This raises the question: when should we really start putting money into a retirement fund?
It’s now common advice that we should begin saving for retirement as early as possible, but what happens if we’ve already missed the twenty-something savings boat? The simple answer is that it’s never too late to start saving. So why are we talking about age? It plays a major factor in deciding what percentage of your income you need to save each month! Let’s start with the basics:
What are you saving for?
To really determine the amount of money you should be saving each month it’s important to determine your goals. One of which should be planning for retirement and pinning down what that looks like for you. For example, someone who wants to retire at 55 instead of 65 will need a larger retirement fund to cover those extra ten years. Although the majority of this article will cover retirement planning it’s also important to point out that experts recommend having an emergency fund with enough money to cover at least three to six months of expenses.
Why save for retirement?
Wouldn’t it be nice if our living expenses disappeared when we retired? Unfortunately many of your every day expenses will last a lifetime, and you may even have a few extra as you get older, including additional medical expenses. Thinking about what your spending will be like during your retirement is an important step in understanding why you need to plan. You may be planning to rely on social security payments topped up by a 401k, but have you calculated to see if this “income” will cover your retirement expenses? If it won’t, which is very likely, then you should start saving as soon as possible.
How much should you save?
There’s been a lot of talk recently about Elizabeth Warren’s financial planning guide known as the 50/30/20 rule. It’s a simple system that helps you budget your finances by breaking down your spending into three areas: expenses, personal items, and savings. The aim is to spend less than 50% of your income on expenses and less than 30% on personal items each month. This leaves you with a minimum of 20% of your income that can be put towards your retirement fund each month. This system is a great way to think about budgeting your money, but it’s not necessarily right for everyone and should be used as a guide not an exact science. The purpose of this system is to help you develop a budget that doesn’t leave you financially struggling now but also allows you to put enough money towards your retirement plan.
Calculating the exact amount you need to save
If you really want to identify how much you need to save per month you’ll need to do some calculations. Your number will be based on how many years you have left until your desired retirement age, how much you have saved, your current income, and how much money you’ll need per year during your retirement. Luckily there are some great online calculators, including one by Vanguard and another by CNN, to help you work this out.
Starting to save today can help you avoid financial struggles during your retirement years. Whether you plan to put aside a flat rate per month or are ready to figure out your exact needs it’s never to late, or early, to start!