Saving for Retirement

Saving for retirement should begin the day you start your first job as an adult. Why? Because the more years you save, the more compound interest you can make for your retirement fund. For example, if Jane contributed $83 a month into her company’s 401k plan when she was 25 years old, in 40 years when she retires, that $40,000 she put in would now be valued at $154,142 because of compound interest (assuming a modest growth of 6% compound interest). But, if she would have waited until she was 35 years old to contribute $83/month, it would have only grown to $78,741 by the time she was 65. So, the more years you contribute to a retirement fund and the longer it is in the retirement fund, the more money you will have to support you in retirement.

How much money do you need to retire on?

The federal government has a nice calculator to help you estimate how much you want to save. On average people need to have 80% of their pre-retirement income each year to live on in retirement. It is estimated that up to 40% might come from social security benefits. You would need to save the other 40%. Use this calculation example to determine how much you need to save the other 40%. Use this calculation example to determine how much you need to save:

1. In how many years do you want to retire? 35 years (Find the projected salary-growth factor from this table.)

2. How much money do you make now before taxes and other deductions? $40,000

3. Multiply current income by the projected salary-growth factor: 2.8139 x $40k = $112, 556

4. Multiply this number by 0.40 (40%): $45,022.40 This, plus Jane’s social security benefits, will be needed/used for her first year of retirement in 35 years.

To find out how much you need to have saved by the time you retire to last you throughout retirement, follow these steps:

1. What is the number from Step 4 above: $45,022.40

2. How many years do you estimate you will live in retirement: 25 years (Find the projected income-growth factor based from the table below and multiply it by Step 1.

The savings Jane needs to have by retirement to have income for 25 more years: $739,740

The federal government also has a calculation for how much you would need to put into savings each year to meet your retirement savings goal. Click here and go to page 42.

How do I start to save for retirement?

1. If your company has a 401k plan, start contributing a percentage of your income each paycheck. If your company has a matching program, be sure to contribute at least that amount so you are not missing out on free money! For example, if your company will match up to 3% of your contributions, you should at least contribute 3% because that becomes 6% with their match.

2. Open an IRA or a Roth IRA. Find a financial adviser to do this for you. Ask a friend or your company for ideas for advisers. Even if you can only put in $25 a month, it will pay off in the long run because you will have that compound interest being earned each year.

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