Retirement savings are essential to financial security – yet only half of Americans have enough saved to retire comfortably. What should you do now to ensure you’ll have enough money later?
Investing and saving money is always a good idea but why is it important to save for retirement in your early years?
And why is it so important to ensure that you have enough saved for retirement? We took a closer look at some of the things you need to consider.
Why Is It Important To Save For Retirement?
There are a number of reasons that it is important to prioritize saving for retirement, and the main reasons include:
1. You Cannot Rely On Social Security
Social Security benefits are very unlikely to be enough to live on when you need them, and in most cases, will not even cover your basic living expenses.
According to the Social Security Administration, just 40% of your average monthly wage will be replaced by Social Security, while the majority of financial advisors recommend that 70% of monthly income must be saved by seniors to live comfortably in retirement.
This means that saving for retirement is crucial to allow you to maintain your standard of living after you stop working. If you don’t save enough, you could end up with less than you need to survive.
2. Your Future Income Will Be Less Than You Expect
If you don’t start planning for retirement today, you could find yourself working well into your 70s or 80s.
The Bureau of Labor Statistics reports that the median age of workers who receive their first job is 22 years old, but the median age of those who reach retirement is 67 years old.
This means that if you wait until you’re 30 before starting to save for retirement, you may never get there!
3. Saving For Retirement Can Increase Your Wealth Over Time
Saving for retirement can increase your wealth over time because you’ll earn interest on your investments.
In fact, according to the Center for Retirement Research at Boston College, people who put away 10% of their paychecks every year will see their nest egg grow by more than $1 million over 50 years.
4. You Could Need More Money Later In Life
The costs associated with health care, long-term care, and other major expenses can add up quickly, and they often require significant amounts of money.
A recent study from Fidelity Investments found that the average cost of out-of-pocket medical expenses was $6,700 per person last year. That’s nearly three times what it was in 2000.
5. You Want A Debt-Free Retirement
The longer you delay saving for retirement, the harder it becomes to make ends meet once you’ve paid off any debt you might have.
While paying down debt is an excellent way to improve your finances, delaying saving for retirement makes it much more difficult to achieve this goal.
How Much Do I Need To Save For Retirement?
It is impossible to say exactly how much you need to save for retirement without knowing your specific situation.
However, the following factors can help you determine how much you should be saving:
- Your Age
According to the National Institute on Aging, the amount of money needed to support your lifestyle throughout retirement increases as you get older.
Those between the ages of 55 and 64 will need about 75% of their pre-retirement salary, while those 65 and older will need 90%.
- Your Current Savings Rate
You should also consider your current savings rate. According to a report from Bankrate, only 35% of Americans currently have anything set aside for retirement.
If you fall into this category, you’ll want to boost your savings rate, so you can begin contributing to a 401(k) plan or IRA account.
- Your Financial Goals
Finally, you’ll want to take into consideration your personal goals for retirement. Are you hoping to travel the world? Or are you looking forward to spending more time with your family?
These two things can be accomplished quite differently, which is why it’s important to know what you hope to accomplish during retirement.
How To Start Saving For Retirement
Now that we have taken a look at just why saving for retirement is so important, it is time to consider the steps that you can take to make it easier for you to save.
Some top tips include:
- Start As Soon As Possible
If you would like to retire early, then you should start saving for retirement as soon as possible. According to the IRS, you can deduct contributions made to a traditional IRA or Roth IRA, but not both.
So, if you contribute to a traditional IRA and then convert it to a Roth IRA, you won’t be able to claim the deduction for the contribution.
- Make Sure Your Employer Has An Option For You
If you don’t already have access to a workplace retirement plan through your employer, then you may want to check with them to see if there is one available.
Many employers offer these plans to employees, and they usually provide a match for your contributions.
- Consider Contribution Options
There are many different options when it comes to making contributions to your retirement accounts. The most common option is to open up a traditional IRA or Roth IRA.
Both types of accounts allow you to contribute a certain percentage of your income each year.
- Save At Different Rates
One last thing to keep in mind is that you shouldn’t try to save too much all at once. Instead, you should spread out your contributions over several months.
This way, you will avoid having to pay taxes on any earnings that occur within the same period.
Hopefully, this article has helped you understand why it is so important to save for retirement.
Now that you know why you should be doing so, you should feel better equipped to take the steps that you need to safeguard your future, pay off your debts and bills, and ensure that you can enjoy a relaxing, healthy retirement that is free from money worries and concerns.