Your questions on saving for retirement: Answered.

While we’d all love to stay forever young, that just isn’t going to happen. But hey - aging has its perks! We’re talking more life experience, moving up in your career, and eventually getting to use that sweet senior discount at the movies. Oh, and did we mention retirement? Ah yes, the time of your life when you get to say “Hey, I paid my dues. Time for me to relax.” We’re all secretly dreaming of that day - no matter how much you think you like your job - but here’s the catch: what are you doing right now to take care of future you and prepare for retirement?

You probably think of retirement as being too far off to be worrying about it right now, most Americans do, which is why about 45% of working-age households aren’t saving up for it. But just because this milestone may be decades away doesn’t mean that we shouldn’t be trying to understand it now and taking action on this big financial priority. To be sure that you understand everything about retirement and the steps you should be taking in your working-age life, we’ve answered some of the most common questions about retirement.

Why is saving for retirement important?

Retirement is what you get to do when you stop working, but it all relies on how much money you save before you do.

But besides all your entertainment and fun times you’ll get to enjoy sans-job, you’ll still need to support yourself, just like you’re doing now with all the money you spend on food, shelter, and clothes, except you won’t have the income from working to help you do that. Sounds kind of intense, right? All that pressure to save enough money to live on the rest of your life between now and your mid-60’s, and hopefully have enough left over to leave to your children.

So that’s the challenge: you can't let it seem too overwhelming or too far off to stop you from saving. Which brings us to the next question.

How do I save enough?

If you’re following our budgeting rules, you already know that 20% of your monthly income should go to some sort of savings - so the question is: how much of that 20% goes to saving for retirement? It is recommended that 10-15% of your annual income goes toward retirement, so a couple of calculations later you’ll find that you should be putting aside just about 1% of your monthly income toward supporting your future self. That makes things sound a little less scary, doesn’t it?

However, you could even do yourself one better when it comes to saving other than just adding it to your budget. Consider investing. When you save your money, it sits there waiting for you until you’re ready to use it again. But when you invest, the money you set aside will grow - and you don’t even need to put the full amount into it! Just investing $50 could turn into $1000 way down the road. The other benefit is that investing will help you to beat inflation (which increases at about 3% every year) because while prices on everyday goods increase throughout the years, the money that you’ve invested will continue to increase as well.

Wait - how much should I save?

This is relative. Of course, we have the general recommendation of how much you should be budgeting, and investing based on your income, BUT this will ultimately depend on how you envision your future. Do your retirement plans include frequent trips to Europe to relax on the islands of Greece? Or do they involve downsizing your home and enjoying the simpler things in life? Knowing this will help you to determine what replacement ratio you should be aiming for, or what percentage of the income you’re currently earning you hope to live on in the future.

We’d recommend a replacement ratio of 70-80% of your current income, allowing you to live comfortably, just the way you are now, and able to afford occasional trips and extra or unexpected expenses. However, you can also choose to live a more budgeted lifestyle at 60%, which doesn’t leave you much room for emergencies, or go all out on those Europe trips and guarantee inheritance for your family at 100%.

Of course, the earlier you start, the more you’ll have saved, and the less you’ll have to set aside from the beginning. So...

When should I start saving?

It probably sounds crazy, but you’ll want to begin saving for retirement at age 25. You’re young enough that you have decades of time to save enough money to keep yourself comfortable, but you’re also likely to be done with school, established in your career path, and knowing where your money is coming from every month.

The great thing about starting off young is that you can also start off small while you worry about other finances that come with establishing your adult life (like your mortgage or paying off student loans), and the sooner you put it in, the more time that money has to grow. Assuming that you get a 7% annual return on your retirement fund, if you put in $3000 a year when you’re 25, you’d have double the amount by the time you’re 65 than you would if you had started in your 40’s.

Still, it’s never too late. So, if you’re reading this article at a solid 42 years old and haven’t thought a bit about retirement, it’s okay, we still welcome you and are here to support you, but it’s time to get started.

What are my options?

So, you know that you can save or invest, but how will you go about doing that? There are a few types of retirement accounts you can choose from: a 401(k), where your employer will match all that you put into the account and taxes are paid when you take it out, a Traditional IRA, where each contribution you make every year is tax-deductible, you don’t pay taxes as your income grows, but you do pay taxes when you take it out at 70, and a Roth IRA, where you pay taxes upfront at the current rate, but never have to pay taxes on your investment earnings.

With all of these things in mind, saving early, investing, and making it a priority, you’re sure to be on your way towards making a stress-free, future life for yourself.