How Much Do I Need to Invest to Retire?
Saving for retirement is a necessary step in your financial life. When you plan ahead for retirement, you have to decide how much you want to set aside out of each paycheck. You want to ensure that you have enough money to live on once you retire, but you do not want to cripple yourself financially now to reach that goal.
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Percentages
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Financial planners often differ on how much they recommend to set aside for your retirement. One of the common rules of thumb is to set aside 10 percent of your income every time you get paid to fund your retirement. Other financial planners would recommend starting out with 15 percent when saving for your retirement. If you can only afford 10 percent, this is a good start, and then you can bump your savings up to 15 percent in the future.
Matching
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Something else to consider is whether your employer matches your contributions or not. If you have access to a 401k, it makes sense to contribute to it so that your employer will match as much as possible. This is free money that you can use for your retirement, and it essentially adds to the percentage of your income that you are setting aside for retirement.
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Investment Performance
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Even though you can control how much you set aside every month, the one thing that is out of your control is the performance of your investments. When you put your money into a 401k or an IRA, you need to put it into different securities like stocks and bonds. If the investments perform very well, you could potentially get away with investing less out of your paycheck. If they do not perform well, you need to set aside more money to make up for it.
Tax Status
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When deciding how much money to set aside, evaluate the tax status of your investments. Different retirement accounts have different tax treatments associated with them. For example, with a traditional IRA or a 401k, you set aside money on a pretax basis and then pay taxes on the money when you retire. With the Roth IRA, you set aside after-tax money and do not have to pay taxes once you retire.
Considerations
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If you are a younger worker, you do not necessarily need to be focused on a specific percentage out of your income or a specific amount that you want to save by retirement. So many things could change over the next 30 or 40 years and you never know what could happen. If you are simply saving as much as you can, you are better off than the vast majority of retirement savers.
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