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It pays early to start early with retirement planning.
You need up to 80% of your annual income today to retire comfortably.
Here are five ways to help get your retirement plan off the ground.
Key Takeaways
- Calculate your fixed, flexible, and discretionary expenses to estimate how much income you'll need in retirement. This will help you set a savings goal.
- Allocate a portion of your income towards retirement savings. A general guideline is to save around 10-15% of your income for retirement.
- Consider options like a 401(k), traditional or Roth IRA, SEP IRA (for self-employed individuals), or SIMPLE IRA. Each option has its own advantages and contribution limits.
- If you're behind on retirement savings, take advantage of catch-up contributions. In 2023, individuals aged 50 or older can contribute additional amounts to IRAs and 401(k)s.
- Continually save each month, and consider increasing contributions when you receive a raise. Control nonessential spending and avoid lifestyle inflation, even as your income increases.
Step 1: Determine How Much You Might Need to Retire Happily
It's time to crunch some numbers and review your expenses.
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Fixed expenses: Mortgage or rent, life and health insurance, utilities and other necessary expenses
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Flexible expenses: Groceries, clothing, transportation and more
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Discretionary expenses: Travel, gym memberships and other nonessentials
Let's say the total equals $3,000/month. You'll likely need a minimum of this amount in retirement income to cover these expenses.
Multiply your total retirement income for the year by the anticipated length of your retirement to come up with a savings goal.
Step 2: Make Saving a Priority
After you have a savings goal, determine how much you should put aside each month. A good rule of thumb is to set aside about 10-15% of your income for retirement.
Step 3: Decide How You'll Prepare for Retirement
Here are some options:
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401(k): Contribute a percentage of your income. Some employers even match a portion of your contributions.
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Traditional or Roth IRA: Put pre-tax or after-tax dollars into a retirement account.
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SEP IRA: Self-employed? Make tax-deductible contributions of up to 25% of your salary, which cannot exceed $66,000 for 2023.
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SIMPLE IRA: Make tax-deductible contributions of up to $15,500 for 2023.
Step 4: If You're 50 or Older, Consider Making Catch-Up Contributions
Behind on retirement savings? If you're 50 or older, making catch-up contributions can help you get closer to your goal.
For 2023, you can contribute an additional $1,000 to an IRA or an additional $6,500 to a 401(k).
Step 5: Put in the Work
Continue to save every month.
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Landed a raise? Consider increasing your retirement contributions
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Spend less on nonessentials
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Avoid lifestyle inflation — earning more doesn't mean you should spend more
Start developing the road map to your retirement destination today.
