There's a reason today's workers are so strongly encouraged to save for retirement: You can bank on needing more than just Social Security for income once your career comes to an end. And if you don't build up a large enough nest egg, you might struggle financially.
But just how large an IRA or 401(k) plan balance should you be aiming for? You'll often hear that saving $1 million in retirement will leave you in a good place financially, but you may not need that much money later in life. Or, you might need a lot more.
In fact, there's really no such thing as an optimal retirement number to aim for, because we all have individual goals and needs. So if you're trying to determine how much money you ought to be saving for retirement, it might help to run through these questions.
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1. Where do I want to live?
Some parts of the country are far more expensive than others. As you try to narrow down your retirement savings target, think about where you want to call home as a retiree. Is it an inexpensive rural area, a suburb, or a city that gives you access to nightlife?
Also, think about local living costs. What do state income taxes look like? And how high are the property taxes? The area you settle down in will largely dictate what retirement ends up costing you, so it's important to try to narrow down your choices in the course of your planning.
2. What do I want to do with my time?
For some people, retirement means spending their days traveling the globe. For others, it means getting the grandkids off the school bus and focusing on hobbies and local volunteer opportunities.
It's important to figure out what you want retirement to look like for you on a daily basis. That will help you determine what you ought to be saving.
3. Am I looking to keep working?
Retirement doesn't have to mean the end of holding down a job. You may not want to plug away in an office for 40 hours a week once you reach retirement age, but that doesn't mean you can't find work that's more flexible, fun, and rewarding.
If you have every intention of working as a retiree, it stands to reason that you'll need less money in savings than someone who has similar plans to yours but doesn't want to work at all. And keep in mind that not only can working help you generate retirement income, but it can also serve as a means of occupying your time, thereby leading the way to less spending on your part.
You may decide that it will take $750,000 in savings to pull off your dream retirement. Or maybe it'll take more like $1.5 million. The key is to think about what you want out of your senior years, and then take steps to build up a nest egg that allows you to afford everything you're hoping for.
