How to Retire With What You're Saving Now
Retirement... It has a lovely ring, doesn't it? Retirement can conjure up images of everything from beachside condos to cross–country RV trips. However, the question that matters more than how you'll spend your retirement years is whether you'll be able to afford to retire at all. Whether you're 35 years away or 10, it's time to think about whether you'll be able to retire on the amount of money you're saving now.
It's time to think about the kind of lifestyle you want to be able to afford. If you want to be able to spend your golden years touring the world, you're going to need a lot of dough. If you're planning on moving to a smaller home in an affordable part of the U.S. (such as the South, Northeast, or Midwest), you'll need a smaller nest egg.
In general, you'll need about three–quarters of your annual income to live out your non–working years comfortably. That is, if you live on $100,00 now, you'll need $75,000 per year in retirement. If you currently live on $40,000, you can probably live on $30,000 annually in retirement. Multiply that amount by the number of years you plan to be retired (consider that the average person lives to be 75), and you have a rough estimate of how much cash you'll need.
However, the rate of return you're earning in the meantime can play a huge role in whether or not you meet, exceed, or fall short of your monetary goals. If your cash is sitting in a low–interest savings account, your money is flat lining. However, if you're investing regularly in a 401K, you've put your money to work making more money. (Eight percent returns is the goal you should shoot for to be earning enough without getting risky.) While the earnings won't start paying off immediately (and you should never touch them until retirement, even if they do!), the real payoff comes after about 30 years, at which point the earnings are exponential.
So, say you're 25, you don't plan on retiring until you're 70 (this is the trend, as Social Security benefits keep getting pushed back and people are choosing to work longer as well). If you put just $5,000 per year into an account that's earning an average of six percent, by the time you retire, you'll have saved over $1,000,000––a healthy nest egg, but not an extravagant one. If you're 35, you'll need to sock away nearly $9,000 per year to meet the million–dollar retirement mark with a six percent interest rate. If you're saving less than that, it's time to ramp up your contributions (open an IRA if you need to) and get them working for you.
The bottom line? There are no gimmicks or shortcuts. If you want to retire comfortably––whether that means a yacht or a cottage if up to you––you need to start saving right away, and contribute more than the minimum to your 401K. In the meantime, you can start cutting out a few unnecessary frills now to prepare for the golden years to come.