By Steve Doster | Uptown News
Saving for retirement is something everyone needs to do as a part of their financial planning. Set aside some time and energy to think about your future and how you will pay for your retirement. You will need to save to retire. Here are some simple guidelines to save enough for retirement and do it in a smart way.
The No. 1 rule is to save 15% of whatever you make. This percentage should be based on your total income before taxes or any other payroll deductions. Saving this amount will allow you to retire at the normal retirement age of 65 to 67 years old. You can consider other financial planning strategies as well, such as ratcheting up this savings amount to 20% or 25% of your total income if you want to retire earlier, or if you are getting a late start on retirement savings.
These days, it seems like most people are getting a late start on retirement savings. The average retirement savings of someone in their 50s is about $125,000, which is not enough to retire on. If you find yourself in this group, though, don’t beat yourself up! There’s always time to move forward and start saving now.
There are some general financial planning guidelines that can help you save in the smartest way. These recommendations apply to most people, but there are always exceptions. Talk with a fee-only financial advisor to work out your best savings strategy.
The first savings priority is getting the full employer match. Don’t pass up free money. If your company 401(k) will match up to 6% of your pay, then at the minimum, set your 401(k) savings at 6%.
The next priority is to build up an emergency fund. This needs to be three to six months of living expenses. That’s a lot of money, but you need this in case you lose your job, can’t work due to an injury or illness, or have a big car repair. An emergency fund protects you from relying on credit cards when those inevitable emergencies come up.
The next step in your savings strategy is to pay off credit card debt. If you have credit card debt, save up a partial emergency fund of $2-$3,000 dollars. Then focus on paying off credit card debt as fast as possible. Once the debt is gone, go back to building up your emergency fund to the full target amount. But remember, keep saving the minimum to your 401(k) plan to get the employer match while you are paying off credit card debt and building an emergency fund. Free money (the employer match) takes top priority.
At this point, you are saving 6% to your 401(k), have an emergency fund safely sitting in a savings account, and you have no credit card debt. Where should you save next to hit your 15% savings goal? This depends on how much money you make.
Save to a Roth IRA if you qualify to make contributions. To qualify for the full contribution amount, your adjusted gross income needs to be below $122,000 for single and $193,000 for married. You can save $6,000 to a Roth IRA per year if you are under 50 years old. The limit is $7,000 if you are 50 years old or older.
If you don’t qualify for the Roth IRA, then increase your 401(k) savings until you hit the maximum amount. The limits for 401(k) are $19,000 per year in 2019. If you are 50 years old or more, then you can save up to $25,000 per year. These amounts increase each year, so remember to increase your 401(k) savings percentage every January.
The final step in the savings strategy is to open a brokerage account. This can be done at Vanguard, Schwab, or anywhere you can buy low-cost mutual funds. Set up a recurring monthly transfer from your checking account to this brokerage account. The amount depends on how much more you need to save to hit your 15%-25% savings goal.
Smart financial planning includes thinking about your future. Saving now is for the benefit of your eventual retirement. Save at least 15% of your income and follow the savings priorities outlined above.
– Steve Doster, CFP is the financial planning manager at Rowling & Associates – a fee-only wealth management and CPA firm helping individuals create a worry-free financial life. Rowling & Associates works to a fiduciary standard of care helping people with their taxes, investments, and financial planning. Read more articles at rowling.com/blog.