Americans are reporting slightly higher confidence in their ability to retire, but how best to get there continues to confuse many. According to the Employee Benefit Research Institute’s 25th annual Retirement Confidence Survey, nearly 40% of American workers think they need to save more than 20% of their income each year to reach their retirement goals. Another 27% have no idea how much they should be saving. What’s the right answer?
Part of lowering anxiety about one’s financial hinges on having a strategy in place.
“Those without a retirement plan seem to understand they are likely to have difficulties accumulating adequate financial resources for retirement: 44% of workers without a retirement plan are not at all confident about having enough money for a comfortable retirement, compared with only 14% of those who have a plan,” said Jack VanDerhei, EBRI research director and co-author of the report.
But for those with a plan in place, what rule of thumb should they be using to make sure they’re actually on track?
How Much Should You Save?
If you start early, saving 15% a year will put you on pace for a comfortable retirement. If you’re a little late to the party, calculate how much you could have already saved. Add up your income from previous years, and multiply it by 15%. Use past tax returns or create a Social Security account if you don’t know your prior year’s earnings. This will give you a concrete savings goal to make up for lost time in your 401(k).
Save Big When You Can
Next time you get a large chunk of money, set aside half of the total amount, or more if you can. Many people do this with their tax refund, but it’s a good idea to do it when you get a raise or a bonus as well. When it’s extra money you weren’t expecting, it’s a lot easier to save.
Give Your Money a Job
You need to do more than save, however. Make your money work for you by investing as aggressively as appropriate for your age. Being conservative might prevent big losses, but it can leave you at risk for not having enough gains in your retirement account. Investing isn’t always smooth sailing, but those who do it come out ahead in the long run.
Live Longer, Work Longer
Staying in the workforce until age 70 allows you to add to your retirement accounts rather than withdrawing from them. Postponing your Social Security benefits until you reach age 70 results in a 32% increase in your monthly payment for life. These two factors add up to a much higher quality of life in retirement. To have that kind of career longevity, you have to plan ahead. It might require switching to a consulting role, or changing industries completely. Start planning career transitions well before you need to, so you have control over your options.
Written by Lauren Lyons Cole of TheStreet