Monday, February 9, 2015

How much should you be saving for retirement?

I mentioned in the last post that here in the DIY$ household, we saved 18% of our income towards our retirement in 2014. In years past, we have contributed as much as 24% of our income towards retirement and as little as 0% while working at various jobs prior to graduating from college. When calculating how much I am saving, I include employer 401k match money in my figures.

So what is the right number for you? The short answer is, it depends. Don't you hate that?

Rather than give an inappropriate one-size-fits-all answer to this question, I would recommend taking a look at a simple retirement calculator like Fidelity MyPlan (not an ad) and putting in your actual numbers. I've looked at several online retirement calculators, but I find this one to be very good for this type of quick estimate. You certainly would want something more comprehensive if you were close to retirement, but this gives an easy answer to the question I hoped to address here.

The takeaway from the calculator is that there are some things like your age and current savings that can't be changed, but others that you can control, such as when you hope to retire, or how much you save each month. The earlier you start, or the longer you plan to work, the less you need to save each month. As I discussed in the last post, the time you have to invest can be more important than how you invest or how much you invest.

One additional thing I'd like to point out is that I would caution you against falling into the trap of investing more aggressively in an attempt to make up for lost time. Risk is a two-edged sword and if you haven't experienced significant negative swings in the market, you don't yet know how much willpower you have to stick to a plan. Likewise, I would urge you to not invest so conservatively that you don't get to see the true power of compound interest, especially for timeframes longer than 10 years.

Did the calculator tell you anything surprising? Did it create more questions?

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