On average, you need $1.7 million to retire. That may seem like a massive chunk of money, especially if you're just starting off, but it's easily achievable if you stay diligent. There's not just one way to get there either, but there are tips and tricks that you can keep in mind to improve your overall retirement nest egg. Let's take a look at some different factors you need to keep in mind to determine how much money you need to retire, as well as strategies for growing your wealth along the way.
64% of people think of themselves as savers, not investors, which is an issue if you're trying to grow your retirement savings as much as possible. 54% of 401K participants say they take any additional savings and place it in a low interest savings account. This is obviously advisable if you otherwise don't have some savings to fall back on if you lose your job. However, if you do have those savings, you need to be investing other than 401K accounts you can put excess savings into IRAS, brokerage accounts, or even health savings accounts? Savings accounts are terrible ways to store cash, and in most cases their interest rates don't even keep up with inflation. Even high interest money market accounts only pay out about 2 to 3% annually. Annual inflation is roughly 2.3%, meaning that you're only barely not losing money on the high side of those interest rates. So your first goal should be building up some savings to fall back on in the case of hardship, but invest anything over that in retirement accounts or through brokerage accounts in stocks. 401K's might also seem like a box you check on your pay deductions and then never touch until you retire. However, that shouldn't be the case. You can think of 401K's like any other investment account, except for the fact that you can't take out the money before you retire without penalties. With 401K's, you can select how you want your investments divided up. How risky? You want to invest your money and you can even set annual contribution increases to automate everything to make sure that you stay on track. Managing 401K accounts actively can ensure that they provide the greatest return possible. Investments are rarely ever set it and forget it deals, even when you're talking about something as far off as retirement for some people. None of that really answers the question that we sort of answered at the beginning of my today writting. How much do you need to retire? And how can you figure that out? We're finally ready to answer that question now that we've got some basics out of the way. General expert consensus is that you need about 80% of your pre retirement income. So if you make $100,000 a year at age 65 or the year before you retire, you'll need to have enough saved to cover $80,000 in expenses for every year that you plan to be alive in retirement. You can adjust this amount up and down if you will have other retirement sources of income. Like a pension or government benefits. But in general this is a good rule of thumb. Other things can make that necessary number go up too. Like if you're planning to travel extensively in your retirement years, you'll probably want even more saved. So extrapolating these numbers out, if you plan to retire at 65 and will likely live to be 85 and make $100,000 a year at age 65, you'll need 20 years of income, or $1.6 million saved. However, think of this as a bare minimum. If there's a chance that you live past 85, then you'd run out of money. If you have higher retirement expenses due to health, you might also run out of money. You want to plan for the worst case, because chances are you won't want to go back to work, or even be able to at age 70 or 80. Another way to calculate how much you need to have invested is by using the 4% rule. For this, you divide the required annual retirement salary $80,000 by .04, or the numerical representation of 4%. This roughly estimates that you'll need $2,000,000 to retire. Both of these methods provide some ballpark estimates, but you're starting to see how just changing a few variables can drastically change how much you need saved. One of the best rules to follow in saving for retirement or just plain financial planning is the 152550 percent rule. This means that you'll need to save 15% of your salary at age 25, with 50% of that investment being in stocks. If you're already over 25 with no savings, you'll need to increase that percentage to catch up. Another general rule to follow is to have an amount saved by 30 that is equivalent to your annual salary. So, drawing back to the earlier numbers, if you make $100,000 a year at 30, you should have $100,000 in a retirement account. The benchmarks don't just stop at 30 though. By 40, you should have double your annual salary by 66 times, and by 67 eight times. Luckily, thanks to compounding interest, all of this doesn't have to come in the form of raw paycheck deductions. For example, if you contribute 15% of your 100K salary at 25, by 65 you'll have $3.1 million invested. However, you'll only have contributed 40 years of $15000 each year, meaning just $600,000 from your paycheck. Compounding interest luckily transforms that $600,000 into 3.1 million over those 40 years. So in short, how much should you save for retirement? Roughly 30 times a comfortable retirement salary for you, generally 80% of your last year's salary, underscored by the math we just mentioned if you're looking for a way to put your excess money to work. You can use investment accounts through Weibo or Robin Hood. Both of these stock investment platforms don't charge any money on fees, so you won't lose out on any of your investment income to those pesky fees. I have links to register for both of those but you can find it and go to there, where if you sign up they'll give you a free stock. Thanks for reading.
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