No matter your age or how far along you are in your career, you should be saving for retirement. Exactly how much you should save, though, depends on several factors, including what type of lifestyle you expect to live in retirement, how much you’ll be able to rely on Social Security benefits, and how much you expect to spend on healthcare.
For that reason, your retirement goal will likely look different from your colleagues’ or friends’ goals. That said, sometimes it’s fun to see what other workers your age are saving in their retirement accounts. You may use it as motivation to save more, or, if you’re saving more than average, it could boost your confidence and encourage you to keep up the good work.
How much the average worker saved last year
The average baby boomer saved around $9,433 in their 401(k) last year, and millennials saved an average of $7,257.
That sounds like a lot of cash, but the annual contribution limit for 401(k)s is $19,000 as of 2019, so the average worker is nowhere close to maxing out their retirement account.
You don’t necessarily have to max out your 401(k) in order to save enough for retirement, but it’s also not enough to simply compare your balance to what other workers are saving. You may be saving more or less than the average worker your age, but that doesn’t necessarily mean you’re on or off track for retirement.
How much you should be saving for retirement depends on your unique situation. While it can be enlightening to compare your savings to others’, it’s ultimately more important to set your own goals based on your individual financial needs.
How much should you be saving for retirement?
The first step to figuring out what you should be saving is to estimate what you expect to spend in retirement.
Many people assume they’ll be spending around 75% to 85% of their preretirement income once they leave their job, but retirement spending isn’t always so clear-cut. Many retirees actually increase their spending during the first few years of retirement, a report from JPMorgan found, and around 80% of retirees experience substantial spending shifts at various points during retirement.
As you’re planning for retirement, think about how your spending will change once you retire. Make sure to budget for big vacations, home renovations, and any expensive hobbies you may pick up once you retire, and don’t forget about other major costs like healthcare expenses. You don’t have to budget every penny in retirement, but at least think about how much you’ll be spending compared to your current expenses.
Another factor to consider is how long you expect to live in retirement. Nobody can predict their exact life span, of course, and it’s not exactly the most pleasant topic to think about. But estimating how many years you’ll spend in retirement can give you a much more accurate picture of how much you’ll need to save.
Once you have these numbers in mind, use a retirement calculator to get an estimate of what you should have saved by retirement age, as well as what you should be saving now to reach that goal. You may find that it’s much more or less than what the average worker your age is saving, and that’s OK. Everyone has different goals, and the most important thing is that you have a target in mind and a plan to reach it.
Boosting your savings one dollar at a time
Depending on how much you should be saving and how many years you have left to save, it might be challenging to come up with enough cash to put toward your retirement fund. There are some things you can do, however.
First, if your employer offers matching 401(k) contributions, take full advantage of them. Matching contributions are essentially free money, so make sure you’re at least saving enough in your 401(k) to earn the full match. Every dollar counts, and even a few extra dollars per paycheck can go a long way over the long term.
Next, comb through your budget to see if there are areas where you can trim your expenses. Look for any wasted cash — like an unused gym membership or subscription services you rarely take advantage of — and reallocate that money toward your retirement fund. Then see if there are other areas where you can cut back, such as by eating out less often or carpooling to work a couple of times per week to save money on gas. Individually these cutbacks may not seem to make much of a difference, but you may be able to save hundreds of dollars per month.
It’s human nature to want to compare your savings to what others have stashed in their retirement funds, but ultimately, your goals should be based on your individual financial situation. By setting goals for yourself and then creating an action plan to achieve them, you’ll be setting yourself up for long-term financial success.
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Source: The Motley Fool