How Much Money to Save for Retirement
With the Social Security system crumbling, retirement planning is becoming increasingly important to all Americans. However, without a crystal ball, knowing just how much to save is difficult. Here are some suggestions that may help you decide on a retirement budget.
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Time Frame
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No matter how much you save for retirement, starting as early as possible is key. Time is an extremely important factor in investing, and the earlier you start saving, the more time your money has to compound and grow. For instance, if you invest $5,000 at age 20 and average 10 percent interest annually, you'll end up with $226,000 at age 60. If you wait until age 30 to invest that $5,000, you'll only have $87,000.
Size
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Your current income and your desired lifestyle in retirement will play a major role in deciding how much you save. Conventional wisdom says to save at least 10 percent of your income for retirement, but if you are a low-wage earner, 10 percent may be difficult to set aside. If you earn an excellent salary, you may easily be able to save much more than 10 percent. Either way, deciding what type of lifestyle you want to lead in retirement should help you set a goal, allowing you to determine how much you need to save each year to achieve said goal.
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Function
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Withdrawal rate will play a big role in how long your retirement savings will last. Experts say that 4 percent is a safe rate of withdrawal for most people (a rate that will allow an investor's nest egg to continue growing and last throughout his retirement). If you have a $1 million nest egg, a 4 percent withdrawal rate results in $40,000 a year in income. If you want to live on more or less than that, adjust your goal accordingly.
Considerations
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Most retirement accounts are tax-advantaged in some way, so the amount you withdraw from your retirement accounts may go much farther than you expect. However, no one knows what tax rates will be like at retirement, so be sure to take advantage of all tax breaks available to you.
Warning
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Although Social Security hasn't collapsed yet, younger investors should not count on Social Security for a substantial amount of their retirement the way their parents may have. If you plan your retirement without Social Security, any money you do receive from the government will be a nice bonus.
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