Build your retirement nest egg by changing the way you save.
The 10% rule has often been recommended by financial planners and retirement experts. The truth is, unless you plan to move overseas after retiring, 10% of your income is not going to be enough to sustain you through retirement.
But what about Social Security, you ask? The government assures the population that Social Security will get the funding it needs to provide for retirees, but it’s better not to rely too heavily on the government when planning out your golden years.
In a May 2019 study, it showed that the average benefit for a retiree was $1,470, or roughly $17,640 a year. Now that is nowhere near a liveable income, so it’s best to find alternative sources rather than depend on the continued longevity of Social Security.
Here are some saving and spending guidelines that you can follow for your retirement to ensure a sustainable lifestyle in your later years.
Rule of 20
This rule states that for every dollar needed in retirement, one should save $20. This means that if you make roughly $48k a year you would need to save about $960k for your retirement. If you kept to the 10% savings rule, that would get you about $913,000. But realistically how many people can save $4,800 a year for 40 years? The truth is most people need to save well over 10% of their income to come close to what they need for retirement.
4% Withdrawal Rule
This rule limits how much you should be withdrawing from your account once you get to retirement. To sustain your savings over a longer period of time, it is recommended that retirees stick to withdrawing a limit of 4% from their accounts in the first year of retirement. That amount should then be used as a baseline for subsequent withdrawals.
How to Save More than 10%
So we have shown that saving 10% isn’t enough for you to retire comfortably. For average salaries of $48k, using the rule of 20 you would need $960k for retirement. By saving 10% or $4,800 a year, your money would need to grow at a rate of 6.7% every year to retire in 40 years.
But what about people in their 30s who don’t have 40 years to save for retirement? It is simply not feasible for some to double their savings and still retire with enough. In general, adding 5% to your savings rate lengthens your retirement nest egg’s longevity by almost a decade.
The easiest way to save more for retirement is to find some for free. The frontrunner here will be getting a job that offers a 401(k) match. What this means is that a portion of your paycheck is deducted to be put towards the plan, and the company throws in some more at no additional cost.
For example, if you contribute 3% of your income and the company contributes another 3%, that’s 6% of your income that you’re saving every year. That’s a no-brainer when you can get 100% return on your money with no risk.
Larger 401(k) contributions have a double benefit. A $5k increase in contributions every year for 40 years, compounded at 6% interest, can skyrocket your retirement savings by $800k. In addition to your annual contribution and the tax savings from putting money into a retirement account, that will go a long way to building a comfortable nest egg.
So start planning for your financial future today and give the Financial Helpers a call. We are ready to assist you in preparing a comfortable nest egg for your golden years.
