In Retirement

If you’re still early in your career like me, you probably worry about how you’re going to pay off last month’s credit card bill, student loans, a mortgage, and little newcomers to the family. The last thing on the list is saving for retirement. After all, that’s like 30 years away!

Why is it so important to start saving early for retirement?

There are many reasons, but for me it came down to one. If you start saving sooner, then you have to contribute less per month to achieve your retirement goals. Here’s an example:

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Mike started saving $200/month for retirement at age 30. If Mike waited until he was 35 (just five years later!), he would need to save over $300/month to reach the same goal at retirement[1].

It’s hard enough to be able to afford putting money away each month, so don’t make it even harder on yourself down the road by waiting.

How much do I need to save?

As with reasons to start saving, there are also many ways to calculate how much you will need in retirement. I started with the advice that many financial planners and websites recommend: If you start early, then saving 10-15% of your income for retirement should make sure you have enough money in retirement[2].

How do I start to save for such an ambitious goal?

Tip #1: Make saving automatic 

Once my paycheck hits my checking account, it’s allocated to monthly expenses. There isn’t much leftover at the end of the month. That’s why I choose to automatically deduct money for retirement out of my paycheck. This ensures that the money never hits my checking account and isn’t spent. This was a big mindset change but now I don’t even think about it.

Tip #2: Never leave free money on the table 

First, you want to make sure that you take advantage of any “free money” your employer is willing to match in a tax-deferred plan like a 401(k). This will make it easier to meet your goal. I started at a savings rate of 6% because my employer matched 100% of my contributions.

Tip #3: Gradually increase your percentage each year or when you get a raise

I set a goal to increase my contribution percentage each year by 1%. After 4 years I was contributing up to saving 10% and I didn’t even notice the impact on my monthly budget.

 

[1] Assumes savings are tax-deferred and earn an 8% return pre-retirement with 3% inflation.[2] http://money.cnn.com/retirement/guide/basics_basics.moneymag/index7.htm

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