Why Save For Retirement & How Much Should You Save?
Do you know how much is in your retirement account right now?
Do you know if you even have a retirement account?
If not, then you’re not alone.
According to survey data from Northwest Mutual’s Planning & Progress Study, 22% of respondents have less than $5,000 in retirement savings. Only 16% have $200,000 or more.
On top of that, only 46% say they don’t know how much they have saved for retirement.
You may be wondering: why is this so important? Why should I worry about saving for retirement right now?
Saving for retirement is one of the most important aspects of financial health. But because it involves a lot of self-discipline and delayed gratification, it’s also one of the most difficult.
After all, what difference does it make if you’re only going to put a couple hundred dollars into the account?
The answer: a lot.
Let’s dive into why you should start saving for retirement, and how to make that happen.
How to Start Saving for Retirement
If you’re hoping that you can just spend all your money and rely on Social Security when you retire, I’ve got news for you.
That’s not going to happen.
In fact, if you make around $50,000 per year now, you can expect less than $22,000 per year from Social Security at age 67.
Since Social Security isn’t a viable option, and most employers don’t offer pension plans any more, your future rests in your hands.
But how do you start saving for retirement?
There are a number of available options. None of them are exclusive, so you should use as many as you’re able:
- Start by contributing to your employer-sponsored account -- 401(k), 403(b), 457(b) or Thrift Savings Plan -- to claim your match
- Use a Health Savings Account (HSA) to put money away for future healthcare costs
- Once you max out your employer-sponsored account (or if you don’t have one), consider a traditional (pre-tax) or Roth (after-tax) IRA
- One you’ve maxed out your IRA, consider investing in a brokerage account
While this may seem like a lot of options, don’t worry. You can always start small, say by investing in your 401(k) to get the employer match, and build from there.
How Much Should You Save for Retirement?
The amount you should save for retirement depends on a number of factors. However, a general rule of thumb is to multiply the amount you expect to spend in your first year of retirement by 25.
So if you want to spend $40,000 each year, you’d multiply that by 25 and arrive at $1 million.
From there, you can back it up to determine how much to contribute each year.
Because of compound interest (more on that later), the further out you are from retirement, the less you have to put in each month.
But the closer you are to retirement, the more you have to save.
Here are some general guidelines of how much to save:
Keep in mind that if your employer offers a contribution match, you can include it in the numbers above. This can be helpful, especially as you’re just starting out and may have less expendable income.
3 Reasons Why You Should Save for Retirement Starting Now
Saving for retirement is ultimately about creating the future you want.
It’s about having the financial freedom to do whatever you want with the latter years of your life, while also living comfortably.
But if you want to achieve that freedom in the future, you need to start saving now.
Here are three reasons why that’s the case.
1. Free money.
Yes, you heard that right.
In most jobs, one part of your benefits package will be participation in the company 401(k) plan and a company match.
You can defer taxes on a certain percentage of your income, and instead place that into a retirement account where it can grow. Then, when you reach retirement age and are able to retrieve the money, you can pay taxes on it then.
What’s more, for every dollar you put into your retirement account, the employer will match that up to a certain percentage.
So by delaying your retirement contributions, you’re literally leaving free money on the table.
2. Compound interest.
Remember earlier when I mentioned “compound interest?”
It’s one of those things that makes saving for retirement so important to your financial future.
When you put money into your 401(k), it doesn’t just sit around and wait for you. In fact, it does the opposite.
It grows over time.
So the sooner you start saving, the more time your money has to grow.
Let’s illustrate this with an example.
So if you have $1,000 to invest today. Conservatively, that will grow at around 10 years, your $1,000 will have turned into $1,600 -- a gain of $600.
But if you let that money grow for twice as long (20 years), you may assume that the gain will be $1,200, right?
Instead, when you run the math, you’ll find that it has turned to $2,600 -- a gain of $1,600.
So your growth compounds over time, based on how long you leave that money alone, and how much you put in year after year.
In the end, this could mean an extra tens of even hundreds of thousands of dollars to contribute toward your financial future.
3. Smarter money decisions.
Are you concerned that by saving for retirement, you’ll end up having to cut a vacation or otherwise reduce your quality of life?
It’s possible that you won’t.
There’s a time management principle called Parkinson’s Law. Essentially, it says that a particular task or project will take up as much time as you give it.
So if you dedicate an entire day to accomplishing a task, it will take you all day to do it.
But if you only have an hour to get it done, the task ends up getting done within the hour.
We believe the same principle applies to your money, albeit to a lesser extent.
Of course, if you lose half your income, you probably won’t be able to make do without some major cuts.
But if you commit to saving just a little bit, you’ll find that you make smarter money decisions. This might be enough to allow you to keep up your lifestyle AND contribute to your financial future.
Final Thoughts on Saving for Retirement
One of the biggest things that keeps people from claiming their employer match is that they just don’t have the extra money to put into their 401(k) account.
That’s where Matchly comes in.
We can help you take the next steps toward your financial freedom without requiring you to change your habits.
When you use Matchly, we provide the funds you need to claim your employer match. That way, you can start saving for retirement as soon as possible.
Kickstart your retirement savings with Matchly
Matchly allows you to get all of your 401(k) employer match, without taking a cut out of your paycheck.
Kickstart your retirement savings.
Get up to thousands of additional dollars every year from your employer and kickstart your retirement savings.
Enjoy your full paycheck
Matchly finances your 401(k) contributions for you, so you don’t have to take a cut out of your paycheck to get your match.