One of the scariest financial statistics I've ever seen is that one in three Americans has nothing saved for retirement whatsoever. If you haven't started saving yet, one of the smartest things you could do is to make 2017 the year you finally get on track. Continuing to delay saving for your retirement would be a mistake you'll certainly regret later.
Social Security won't be enough
Social Security is not designed to be a retiree's only income source. In fact, Social Security is designed to replace just 40% of the average retiree's income. Unfortunately, too many retirees rely heavily on their Social Security benefits. Sixty-one percent of retirees depend on Social Security for more than half of their income, and 33% bank on Social Security for substantially all their income.
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In addition, while there's no way of knowing what reform package will ultimately be passed, there's a real possibility that Social Security benefits will be cut in one way or another by the time you're eligible. This could come in the form of an increase in the full retirement age, lower cost-of-living adjustments, or simply an across-the-board cut. You can read a more detailed discussion of the current state of Social Security here, but in a nutshell, without benefit cuts or tax increases, Social Security won't be sustainable in its current form beyond the year 2034.
How much will you need to retire comfortably?
There's no one-size-fits-all way to calculate your retirement "number." However, experts generally suggest that you'll need about 80% of your pre-retirement income to sustain your quality of life after you retire, so here's a good way to estimate what your savings target should be.
First, determine how much income you can expect from Social Security and other sources such as pensions. You can get a good estimate of your Social Security benefits by creating an account with the Social Security Administration at www.ssa.gov and viewing your latest Social Security statement. Similarly, you should be able to estimate your pension income by viewing your latest statement or logging on to your pension program's website.
Next, multiply your current income by 0.8 (80%). This is roughly how much income you'll need after you retire. Subtract your expected Social Security and pension income from this number to see how much income you'll need from your savings.
Finally, the widely used "4% rule" of retirement says that in order to make sure your money lasts longer than you do, you can safely withdraw 4% of your savings in the first year of retirement and then give yourself cost-of-living adjustments in subsequent years. So, multiply your income requirement from the previous step by 25 to determine your retirement savings target.
As I mentioned, this is not a perfect formula, and your actual retirement savings need might be higher or lower. However, the takeaway is that you may need to save more money for a comfortable retirement than you had expected.
You don't need a ton of money to get started
It's a common misconception that you need to have at least a few thousand dollars to get started with investing, and this is 100% false. Sure, if you want to create a well-diversified portfolio of individual stocks, you'll need this much, but for most investors with limited funds, the best way to get started is by investing in mutual funds and ETFs.
Many mutual fund companies waive their minimum investment requirements for people who commit to a regular investment plan. As one example, Charles Schwab normally requires at least $1,000 to open an account, but will let you get started with just $100 if you commit to a monthly recurring investment.
Even better, most online brokers will let you open an IRA with no minimum, and many offer a fantastic selection of commission-free ETFs, so you can get started for the cost of just a single share.
The bottom line is that you can get started saving and investing for retirement for less than the cost of a nice meal at a restaurant, and your money will never again have the long-term compounding power that it does right now. So, make 2017 the year you finally take action.
