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Retirement may seem like an unimaginably distant event for someone in their 20s, but financial advisors say that is the best time to start saving.
“A little bit of money, for someone just starting out in their career, can actually go a long way, and arguably that’s the critical time because that small amount of money compounding and growing for you is really what’s going to matter,” says Ryan Ashcraft, education and marketing manager for URS.
The Magic Number
So what is the right amount of money to save for retirement? That depends.
“Often people just choose a number out of the air, but there’s no real analysis that went into that number—it just sounds good,” says Thurber. A million sounds like a good, hefty amount, but will it last through a long retirement and provide the expected annual income?
“Depending on their income levels and their debt levels and how early they want to retire—all of those factors play a huge role in determining what that nest egg number really needs to be,” says Thurber.
Overall, he says, there is a very big gap between what people think they need and what they actually need.
First of all, you need to decide when you want to retire. “The earlier that you’re looking to retire, the more money you’re going to need,” Thurber says.
In general, for people who are relatively debt free, the rule of thumb is to save enough to replace 80 percent of their annual earned income. But Thurber points out this is just a guideline—some want to spend more on travel and leisure during their Golden Years, while others plan on a quiet, frugal retirement.
“If you need to generate $80,000 a year, and that’s 4 percent of your nest egg, then you need $2 million when you retire,” says Thurber. “To get that $2 million, then we determine how many years to retirement, how much do we need to put away, and then set an annual savings goal.”
Healthcare is another major factor to consider when creating a retirement strategy.
“There’s a huge difference between retiring at age 62 and retiring at age 65 when you’re eligible for Medicare, because of the health insurance premiums,” says Thurber. If you want to take an early retirement, you need to add several years of insurance premiums into your nest egg total.
Building a nest egg is one side of the retirement coin—the other is eliminating debt. Becoming debt free is “equally if not more important that having a nest egg,” says Thurber.
“For those that are nearing retirement, if they have some money saved and are eligible for Social Security, that is a much easier row to hoe if they don’t have any debt. The people that are really in trouble are those that still have 25 years on a mortgage, they don’t have a lot of money saved for retirement and they’re trying to quit working.”
Knowledge is Power
“People need to not be afraid of the numbers,” says Sunder. Ignorance is not bliss. In fact, she says, a basic understanding of retirement planning helps workers feel empowered—even if they have a long way to go.
Thurber agrees. “As soon as people go through the process of running even a simple retirement calculation for themselves, the amount of money that they save goes up, the confidence that they have in their retirement goes up—there’s a lot of benefits that come from knowing, ‘OK, here’s where I’m at, and here’s what I need to do to get where I’m going,’” he says.
AARP offers a simple retirement calculator on its website, www.aarp.org.
“The earlier people start planning, the better off they are,” says Brad Thurber, a financial consultant with D.A. Davidson & Co. He suggests trying to save 6–10 percent of your income per year for 30 years in order to have enough set aside at retirement.
But what if that just hasn’t happened? Thurber has several tips for those who need to play catch-up:
Workers over the age of 50 are allowed to contribute additional tax-deferred money into their 401(k). The maximum annual contribution is now $17,000, but those over the age of 50 can add an extra $5,500. “Each person could realistically contribute $22,500 into their 401(k) pre-tax every year,” says Thurber. And if the company offers a match, then the total is even more.