How Much Should You Be Saving for Retirement, in Plain English…

Did you know if you plan to live for about 20 years in retirement and want to have about today’s equivalent of $120,000/year after-tax, you need to have about $2 million saved (assuming no social security or other pension money, no inflation and a modest growth rate of 5% after fees, etc.) when you enter retirement?

WTF?!?!?!? Where are you going to get $2 million? The number is so ponderous that you throw up your hands and give up. Before you freak out, and talk about learning to like cat food or being nicer to your kids so they will support you, calm down and think about what should do.

I like to do a full retirement analysis for all my clients obviously, but the rule of thumb is that if you are saving 15-20% of you PRE-TAX income, you will most likely be fine in retirement even if you do not have the exact amount you want. If you are reading this article and you have started saving in your twenties, then you will be fine with 12-15% PRE-TAX saved as time is definitely on your side.

Here’s the deal:
If you make $100,000 pre-tax each year, you should be savings about 15-20%. If you’re in your early thirties, 15% is okay (if you are over 35 and just starting, you should be savings 20%). In this example, you’re putting $15,000 away into your retirement plan.

At that savings rate, you are contributing $1,250/month, or if you are paid every 2 weeks, it’s about $577 per check. PRE-TAX. You do not even see it. If your company has a matching plan, and they match up to the first 5%, you only need to contribute 10% per year of your pre-tax to hit my 15% rule of thumb.

At 10%, you’re only contributing $833/month or $384 per check if you’re paid every two weeks. Instead of having about $2300/bi-weekly in your take-home paycheck in our example, you might see $2100. That’s worth it to be secure about your future, right?

Here are the things to remember with retirement savings:

  1. DO IT NOW! After you read my article, get on your company website and get your contribution percentage up to at least 15% INCLUDING whatever your company match may be (call HR and ask if you do not know).
  2. Contribute at least 15% per year, preferably 20%, if your company has NO MATCHING plan
  3. Anything is better than nothing. If you cannot make do with your after-tax pay if you contribute 15% of pre-tax pay per year, reduce the percentage as little as you can, but SAVE something at least.
  4. If your company matches, make sure the TOTAL OF YOUR CONTRIBUTION PLUS THE MATCH IS about 15-20%
  5. If you are married, it is 15-20% of your COMBINED pretax income and one spouse may have a better matching plan and therefore save more than the other. That’s fine.
  6. Do not touch it EVER until you retire. If you desperately need money for a down payment on a house, etc., consider a loan against it. At least the interest will accrue to YOU in your retirement account.

Remember, retirement is inevitable unless you aren’t lucky enough to get to that point and our friend compounding savings is on your side if you start NOW. You can always find other ways to finance college, renovations, etc., but you cannot skimp on retirement.