This blog is longer than most, but it is worth reading. If you are between the ages of 20 and 50 and have not started saving for retirement, this blog is for you! As financial professionals, we hear statements like the following when speaking with prospective clients.
'I can't afford to save right now, but I will start soon.'
The longer you delay saving, the more challenging it becomes to start. Suppose you're employed with a 401 (k) Plan that offers a 4% match, and you're not saving at least 4% of your income. In that case, you're missing out on the employer's 4% match (which is essentially free money). Your employer is keen on aiding your retirement savings, and you're not leveraging that. This is a golden opportunity; all you need to do is commit to saving at least 4% to receive the 4% match into your 401(k). It's a win-win situation.
Below, I will give you hypothetical examples* of what it would look like if you waited to save. The goal is to retire at age 65 with at least $1.5 million saved. Remember that if you work for an employer that offers a match (like I discussed above), this employer is helping you with the monthly total you need to save. So, take advantage of the employer match when one is offered.
Let's start by looking at these hypotheticals:
#1:I am 25 and want to retire at 65. How much do I need to save monthly to have $1.5m for retirement?
Assumptions:
- Annual Return: 7% (a historical average for a balanced portfolio)
- Time Period: 40 years (from age 25 to 65)
- Target Savings: $1,500,000
Monthly Savings ≈ $571.47*
#2:I am 33 and want to retire at 65. How much do I need to save monthly to have $1.5m for retirement?
Assumptions:
- Annual Return: 7% (a historical average for a balanced portfolio)
- Time Period: 32 years (from age 33 to 65)
- Target Savings: $1,500,000
Monthly Savings ≈ $1,050.12*
#3:I am 42 and want to retire at 65. How much do I need to save monthly to have $1.5m for retirement?
Assumptions:
- Annual Return: 7% (a historical average for a balanced portfolio)
- Time Period: 23 years (from age 42 to 65)
- Target Savings: $1,500,000
Monthly Savings ≈ $2,198.79*
#4:I am 53 and will retire at 65. How much do I need to save monthly to have $1.5m for retirement?
Assumptions:
- Annual Return: 7% (a historical average for a balanced portfolio)
- Time Period: 12 years (from age 53 to 65)
- Target Savings: $1,500,000
Monthly Savings ≈ $6,675.72
WOW, what a difference there is from starting to save in your 20s ($571.47/month) to waiting to start in your 50s ($6,675.72/month). Even the eleven-year gap between 42 and 53 results in a considerable dollar difference. These numbers may make you think twice about putting off saving. Here is an important point: Your Social Security benefits are not retirement savings but a sum of monthly income included in your retirement plan. Most individuals cannot live off of their monthly Social Security benefits alone. It is up to you to save for your future retirement. How financially comfortable you are in retirement is solely up to you.
When you meet with our DFG advisors, we will use a retirement calculator to get a more precise figure based on your information. These calculators consider factors like inflation, taxes, and potential changes in your income.
*The above examples are rough estimates. The amount you need to save may vary depending on your specific circumstances and market conditions. Reviewing and adjusting your retirement plan regularly is crucial to staying on track.
Important Considerations:
- It's crucial to consider the impact of inflation on your savings goal. As the cost of living rises, your purchasing power decreases. This means you may need to adjust your savings target to ensure you can maintain your desired lifestyle in retirement. Being aware of and prepared for the effects of inflation will help you stay on track with your retirement savings.
- It's essential to have an emergency fund to cover unexpected expenses. This fund is a safety net, ensuring your retirement savings remain intact.
- Diversification is spreading your investments across different asset classes to reduce risk.
- Professional advice can offer you the support you need to make informed financial decisions. Consulting with a Dixon Financial Group advisor can offer personalized guidance and help you optimize your retirement plan. Knowing that you have a professional on your side can give you peace of mind and help you navigate the complexities of retirement planning.
Additional Tips:
- Start Early: The sooner you save, the more time your investments have to grow. This is a crucial factor in determining the size of your retirement fund.
- Automate Your Savings: Set up automatic contributions to your retirement accounts.
- Increase Your Contributions Over Time: As your income grows, increase your contributions to your retirement accounts.
- Consider a Roth IRA: Roth IRAs offer tax-free growth and withdrawals in retirement.
- Take Advantage of Employer-Sponsored Retirement Plans: If your employer offers a 401(k) or similar plan, contribute as much as possible, especially if your employer offers a matching contribution. *As a good rule of thumb, if your employer offers a match, save the same percentage as the offered match (6% = 6%) or more!
Following these tips and consistently saving can increase your chances of reaching your retirement goals.
Please contact our office today so we can help you reach your retirement goals. Think of your retirement as a marathon race. You are the runner, and we are the people on the sidelines handing out water, encouragement, and if needed, wellness checks. We will be with you from the beginning of the race to the end. Let's get going!