The initial step towards ensuring a financially secure retirement is determining the amount required to live comfortably after leaving the workforce. This figure serves as a target that guides your savings and investment strategy over the years while managing other financial obligations.
Various rules exist to estimate the necessary retirement funds; one reliable guideline comes from Fidelity Investments. According to their recommendation, individuals should aim to save twice their salary by age 30, three times by 40, six times by 50, eight times by 60, and ten times by the typical retirement age of 67. These milestones serve as indicators of progress along the way.
For example, if you are 40 years old and earn $50,000 annually, you should ideally have around $150,000 in your retirement investments, including your 401(k). On the other hand, if you plan to retire at 62 with a yearly income of $75,000, you would require approximately nine to ten times that amount, totaling around $675,000 to $700,000.
It’s important to note that these figures are general guidelines, and the specific amount needed depends on factors such as your spouse’s savings, retirement lifestyle, housing situation, and location.
Nevertheless, armed with this knowledge, you can evaluate your progress and devise a strategy to reach your retirement goals. The strategy need not be complicated; a remarkably simple approach can play a significant role.
The solution lies in taking just one crucial step.
Above all, it is crucial to fully capitalize on any company match offered through your 401(k) or employer-sponsored retirement plan. Failing to do so means leaving free money on the table, which can substantially impact your retirement more than you might realize.
Consider the scenario where your employer matches 4% of your contribution, but you only contribute 2%. Over a span of 25 years, assuming a $50,000 salary at age 40 with a 3% annual raise and an 8% portfolio return, you would accumulate approximately $200,000 if you met the full match. However, if you contributed only 2%, you would have roughly $400,000. The difference is unquestionable.
You could further increase your savings by raising your contribution by just 2% above the company match. Over 25 years, this additional 2% contribution, using the same example as above, would amount to approximately $38,000. That’s an extra $1,250 yearly or slightly over $100 monthly. If you receive biweekly paychecks, it equates to roughly $50 more in each paycheck. By following this approach, you would accumulate around $500,000 after 25 years.
Additionally, you can enhance your savings by consistently paying yourself every month.
Related article: Meet the Super Savers-individuals who have cracked the code to long-term financial success while embracing today’s joys.
The Power of Self-Payment
Let’s say you’ve contributed 6% of your salary to your 401(k) and saved up about $500,000 in 25 years. In this situation, you can add $100 monthly to your retirement savings.
Investing $100 every month for 25 years in an ETF that follows an index, like the S&P 500 or Nasdaq 100, you may accumulate approximately $125,000 by the age of 65, which can be used for retirement. This calculation starts from zero at age 40 and assumes an annual return of 10% for the ETF.
At first glance, $100 monthly is a considerable sum for some individuals. However, if viewed as $25 per week, it can be easily achieved by reducing dining out for lunch from five days to three or by preparing your morning coffee at home instead of purchasing it daily. Additionally, consider canceling one underutilized streaming service, bundling internet and mobile services, or postponing the upgrade to the latest mobile device when your current one is still functional. If you don’t like the idea of canceling one item, try asking for a raise; if you receive an annual raise, you can direct that extra $100 towards retirement without significantly impacting your daily expenses.
Related article: Why Billionaires Swear by Traditional Financial Planning Even in the 21st Century!
In addition to your primary retirement fund and Social Security benefits, starting an additional savings approach as early as possible will greatly benefit your long-term financial well-being and contribute to reaching the desired amount for a comfortable retirement.