Feb 15 2012

How much should you save with each paycheck to reach retirement goals?

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{This post is a part of my retirement series}

Last week, I walked you through one way to calculate how much money you’ll need to retire.

Today we’re going to run some numbers to determine how much we’ll need to invest with each paycheck to reach our retirement goal.

Some rules of thumb suggest investing 10-15% of your gross income for retirement. Perhaps financial planners figure many people should be able to put aside 10-15% of their income without really missing it.

Related: The Save 10% for Retirement Rule is Stupid @Provident Planning

Some folks figure if they are “maxing out their retirement accounts” (putting in $5,000/year in an Individual Retirement Account, and $17,000/year in their 401k this year if you’re under 50) that they’ll be sitting pretty in retirement.

Both of these scenarios — maxing out accounts or saving 10-15% for retirement — can miss the mark.

If you are starting to save for retirement at an older age, maxing out your accounts might not be enough.

The rule of thumb doesn’t take your specific situation into account. It doesn’t factor in when you start saving, how much you’re investing, how long you have until retirement, how much income you’ll want to draw in retirement, pensions…and so on.

So, we’ll need to consider our own situation to determine two things:

  1. How much should we invest for retirement with each paycheck?
  2. Will it be enough?

For many, saving 10-15% will indeed be enough. If you find that you’re not currently on track for the retirement you envisioned, you can take steps now to change that. Better deal with it now, than have a nasty surprise later on, you know?

Start with this overly simplistic calculator to get a ballpark idea of where you’re at. It asks three questions: Your age, how much you make right now, and how much you already have saved for retirement. It makes a variety of assumptions regarding how much you’ll spend in retirement, your retirement age, Social Security, and more. But it’s a start.

That calculator thinks I’ll be fine socking away around 9.4% of our annual income. Ok.

I think that calculator’s assumptions are a bit kind, and that reality could be much harsher. I don’t think its 2.5% inflation assumption is realistic. So I’m going to assume the minimum we can save will be 10%, but we’ll likely need to do more.

Next, try a few more retirement calculators.

Plug in your numbers and fiddle around with different scenarios on inflation and your investment return. Plug in how much you’re currently contributing (along with your company match if applicable) and see if you’re on track.

Right now, we’re doing about 18% of Shane’s gross, including company match. I’m also going to calculate what would happen if we decreased the percentage (say if we lost the company match, which has happened before). It looks like we should hit our goal and then some.

It’s worth running a few different calculators because they each have varying assumptions. We can’t calculate the exact figure we’ll save, so it’s good to get a broad target.

If you keep on doing what you’re doing, will you have enough to retire when you want to? What percentage of your income does it look like you’ll need to invest, minimum?

If your calculations are showing that yes indeed, you are most likely on track for the retirement you want, then yay! Stay the course!

What to do if you discover you’re falling short with retirement savings

Say you just ran the numbers and it looks like you’re coming up short. Don’t panic! Turn that fear into action and come up with a plan to turn this thing around.

    • Increase your 401k contributions. If you have a traditional 401k, your money is going to that 401k using pre-tax dollars. You can put more money here, but your take-home won’t be reduced by as much as if you funded it with after-tax dollars like in a Roth IRA.
    • Increase your retirement savings every time you get a pay raise.
    • Pay off all consumer debt ASAP to increase your cash flow. Once your debts are gone, funnel that money into your retirement account.
    • Are you getting your employer’s full 401k match? Increase your contributions so you hit this mark.
    • Consider delaying when you’ll retire. Working full-time for just an extra few years does two things: It increases how much you’ll be able to save, and it decreases the amount of years you’ll need your retirement income.
    • If you’re debt-free, funnel your windfalls into your retirement accounts. Think pay raises, bonuses, “extra” paychecks if you’re paid biweekly, tax refunds…do all you can to boost your contributions. You don’t *have* to invest 100% of every windfall from here on out — just consider investing a solid portion so you’ll get back on track.

See if there is room to decrease your retirement expenses.

  • Some contributions are always better than no contributions. If you are totally overwhelmed with saving your “required” percentage, at least do something. It will add up, and you never know if a windfall or pay raise could come along later to boost your progress that much more.

Posted under Retirement | 14 Comments »


14 Responses to “How much should you save with each paycheck to reach retirement goals?”

  1. Paying off all of my debt is my first step. Retirement here I come!

  2. I think there’s a very clear solution to the problem of saving for retirement. Start early, and if you’re not young, start now. Save big and save often and you should be okay.
    Even if you’re still in college you should be trying to save something if only to start a good habit.

  3. Starting early really is huge. If that didn’t work, starting period is better than nothing!

  4. Working part time is another alternative. After spending 40+ hours a week working full time, you may want to give it rest for a month or two. Eventually people get restless and need something to occupy their time. Finding a part time job doing something they actually enjoy is great alternative for keeping busy a few days a week.
    JP @ Novel Investor´s last post ..How Tax Brackets Work

  5. I’m socking away about 20% towards retirement, but I still feel like it’s not enough.

    I think after the last downturn in the market, I’m behind in the retirement game now… But as you said, any contribution is better than no contribution!

    I just wish luck was on my side a bit more :)
    Don´s last post ..Blaming Your Credit Card Debt On Your Spouse

  6. I just paid of my student loans and am now beginning to save for retirement. I know I haven’t saved enough yet, but it’s a start. Definitely don’t want to be eating alpo when I retire ;-)
    Kari´s last post ..Buy a House in 16 steps: Step 2-Choose a Realtor

  7. These are some great tips for stashing away extra money in case you’re not quite reaching your goals. One thing I’ve recently started doing is using “6%” instead of “8%” for estimating my average annual return when I look into the future. I think this builds a safe-guard into my planning in case I happen to retire during a Recession.
    MyMoneyDesign´s last post ..What is Shorting a Stock?

  8. This is an important question that many people don’t ask until it is too late. I am currently saving about 12% of my paycheck toward retirement accounts, but I am planning to increase it once my student loans are paid off.
    Eric´s last post ..Yakezie March Madness 2012 – Round 1

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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