Retirement planning for most feels as fun as going to the dentist. It can be hard to estimate how long you plan to work, let alone how much things will cost in the future.
But planning for retirement, especially when it comes to your finances, is incredibly important. Here’s why: making a savings plan can help you to feel more confident that you’ll have what you need when you decide to leave the workforce. It can also help you to reduce your income taxes: most retirement plans like a 401(k) or Roth are tax advantaged, so using them to save can help you save more overall.
And perhaps most important, starting to save—and invest—for retirement allows you to take advantage of compounding. When you put your money into a retirement savings account like a 401(k) or a Roth, you are investing that money in the market.
If the market has an average yearly return of 7 percent, $100 in the market for 10 years can grow to $196.72, without you adding any money to the investment during that time period. If that same $100 was sitting in a savings account with a 0.5 percent interest rate during that same time period, it would only grow to $105.11.
The earlier someone starts to save, the longer their investments have to compound. This essentially means that younger folks require a lower savings rate to accumulate the same amount of money as those who start saving later on.
Given the concept of compounding, it’s clear that starting to save for retirement as early as possible is ideal. But as you’re starting to save, what considerations do you need to make?
For one, you’ll need to consider what age you want to retire at. The average worker retires at 62. While folks often want to work for longer, they are unable to due to changes in their health or employment status.
If you’re in your 20s, this number is likely around 30 or 40 years, while it decreases as you age.
It’s also important to consider how many years you plan to live in retirement. It’s difficult to calculate life expectancy, as modern medicine changes all the time, but the World Bank’s data shows that women are expected to live to 81 years on average. As such, the typical time in retirement is nearly 20 years.
With all this in mind, one can begin to consider how much they want to save for retirement.
Generally, for those between ages 25 and 35, 10 to 13 percent of gross pay is a good goal.
For folks who are between 35 and 45, 13 to 20 percent of gross pay typically makes sense.
For those who start saving between the ages of 45 and 55, it will be important to save even more: between 20 and 40 percent of gross pay.
Using these guidelines, take a look at what types of retirement savings plans are offered through your employer. Do what you can to contribute. These, of course, are rules of thumb. You should not feel intimidated if you can’t hit these numbers. Do what you can now, and revisit it as your income circumstances allow. Remember, the earlier you get started, the better.
Kristen Euretig, CFP®, owns Brooklyn Plans, LLC, a financial planning firm dedicated to helping today’s women.
These articles are for informational purposes only and do not constitute tax or financial advice. Individuals should contact their financial professional for assistance.