Planning, saving and investing for retirement are financial priorities for most Americans. Anyone with even the most general sense of how saving and investing works knows saving as much as possible as early as possible is the smartest path to an early and enjoyable retirement.
In an ideal world, every responsible American would set aside 80 percent of every paycheck starting at age 25 and retire a millionaire by age 55. Unfortunately, in the real world, everyday expenses, bills, emergencies and essential large purchases can't be avoided.
A recent study by the Employee Benefit Research Institute found that roughly one in four Americans has less than $1,000 saved for retirement. The same study found that a third of Americans saving for retirement are setting aside less than 10 percent of each paycheck. More than 40 percent of participants admitted to having no idea how large their retirement nest egg should be. Nevertheless, 60 percent of respondents were confident they will have plenty of money to retire comfortably.
The survey results highlight two critical shortcomings of retirement savers: They aren't saving enough, and they have no idea how much they should be saving in the first place. So how can savers know exactly where they stand and if they are on the right track?
Garrison Urette, president of Garrison Asset Management, says everyone preparing for retirement should at least contribute enough to get the company match for 401(k) and 403(b) accounts. "The match makes a tremendous difference in total savings over time and should be taken full advantage of," Urette says.
Deb Repya, vice president of consumer insights for Allianz Life, says not taking advantage of an employer's 401(k) match is like turning down free retirement money. If you have trouble staying disciplined about putting at least 3 percent of pre-tax income into your 401(k), it's simple to set up automated contributions. "Not only is the company match free money, it also adds significantly to the funds that will now grow over time via the magic of compound interest," Repya says.
For those without a company savings plan, Urette suggests opening a Roth IRA. "I normally recommend contributing 10 percent of income up to the Roth limitation," he says.
Jamie Cox, managing partner for Harris Financial Group, urges clients to set a realistic goal for how much total savings they need for retirement. For example, he suggests that clients take their current annual salary and divide by 4 percent to obtain the targeted amount of savings needed to maintain the current level of income. So, for instance, someone earning $60,000 per year would need $1.5 million saved to continue to earn $60,000 per year in retirement. "Once you have a targeted savings amount, it's quite easy to back into the annual savings required," Cox says.
Jeff Carbone, managing partner for Cornerstone Financial Partners, says he recommends the "rule of one-third" to his millennial clients. According to the one-third rule, Americans should expect to pay a third of their income in taxes, invest or save a third of their income for retirement and live off only the remaining third. "If you do so, you are far exceeding the national saving rate for millennials," Carbone says.
Owen Murray, director of investments for Horizon Advisors, recommends young clients save and invest between 12 and 16 percent of their salary. But new investors, he says, often struggle with discipline. "We often see new investors not saving enough and not staying disciplined about adding to their portfolio," Murray says. "Our most successful young clients are those who make saving for their future a priority."
Financial advisors have their own preferred guidelines or set of rules for retirement saving and investing. A quick Google search will generate hundreds of pages of formulas for retirement planning. Plenty of websites, including AARP.org, offer retirement calculators that allow users to enter their age, income, savings and other information to determine whether they are on the right track to a happy retirement.
Rather than get overwhelmed by the number of different financial paths to retirement, Americans should understand that the critical part of the journey is reaching the destination. As long as a particular savings plan is mathematically viable, the most important part of the equation is starting early, staying disciplined and following the plan.
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