Saving for retirement means accumulating enough money to last you for 20, 30, maybe even 40 years of not working. This may seem difficult or even impossible.
But with some careful planning and the right budget, achieving this lofty goal can be done. And the earlier you start saving for it, the more attainable it will be.
1. Figure out how much you need to save for retirement
The amount of money that you will need for retirement will depend on a number of factors. How many years do you have until you retire? How much will your expenses be after you've stopped working? How many guaranteed income sources, like a pension or Social Security, will you have? What rate of return do you expect your accounts will receive? Figuring out how all of these variables work together by using a pre-retirement calculator will help you better plan for your retirement during your working years.
2. Determine your income
Using your income, you can set an annual savings budget. For example, imagine you are 35, making $100,000 annually, and plan on retiring in 30 years with $1,000,000 saved. You can calculate that if you earn an average rate of return of 8% each year, saving $11,412 each year should help you meet this goal.
Figuring out your income should be easy if it's fixed. But calculating this number could be harder if your pay varies from month to month because of things like commissions or from year to year because of extra payments like bonuses. The more that your income changes, the more you should come back to this step and reevaluate how much you can save.
3. Track your monthly expenses
Knowing how much you spend is vital to the retirement planning process. Big-ticket items like your mortgage or rent are easy to calculate, but the smaller items that you buy may fall through your budgeting cracks. The $5 that you spend on coffee may seem insignificant at the time but over the years can add up. Over 365 days, your coffee budget takes up $1,825 of your income, and over 10 years that amounts to $18,250! If you aren't saving enough, too many of these small expenses can add to that problem.
4. Make necessary adjustments
After you've calculated what you can save based on how much money you make, you'll want to see how your savings match up with how much you'll actually need. You might learn that you should have enough in retirement doing what you're currently doing or discover that you have a shortfall. If you have a shortfall, there are a few steps you can proactively take.
If there are ways that you can increase your income, you can potentially save more. If you can't increase your annual income, you can consider working longer. Each year that you add will both increase the amount of money you can save and reduce the number of years that you need to save for.
You can also work on reducing your expenses. After you've figured out what you're spending, you should categorize them. What do you need and can't live without, and what do you just want? Taking money from things like your car insurance probably isn't an option, but reducing expenses like your travel budget can help you save more. You don't have to get rid of all of the things that aren't necessary, but if you can't meet your savings goals, you should examine how you spend your money.
Saving enough for retirement shouldn't be intimidating or seem impossible. But getting to where you envision yourself in the future requires that you take a careful look at where you are now. It's never too late to start saving for retirement, but the sooner you start the more time you'll have to plan for it, and the more a successful retirement will be within your control.