Even if you’re decades away from retirement, it’s never too early to start saving—and there are some pretty scary statistics to back that up. Financial experts predict that there is a “retirement crisis” on the horizon—meaning too many baby boomers simply haven’t saved enough to comfortably retire. It’s estimated that the average American with a 401k plan will have just $575 a month for expenses by the time they retire. And that’s the estimate of how much the average American with a 401k plan will have. Take into account that half of all Americans don’t even have a 401k plan, and things begin to look particularly bleak.
Nevin Adams, the Director of the Employee Benefit Research Institute, told NPR that only 18 percent of Americans say they’re very confident about having enough money to retire comfortably. A little more than half of people say they’re at somewhat confident about it.
So, just how much do you need to save to live comfortably these days? The old rule used to be $1 million, but now that doesn’t seem to be enough.
Save $1 million and “it translates into $40,000 to $50,000 (annually) in sustainable revenue,” Joe Heider, Regional Managing Principal for Rehmann Financial Group in Westlake, Ohio, told USA Today. “That is not that much money on an annual basis.” Heider suggests a more comfortable number is now $2 million, a pretty daunting sum.
Here, we break down the answers to the most commonly asked questions regarding saving money—when should I start, how much should I save, where should I save, and how do I save? If you have one takeaway, it should be that every little bit counts.
When Should I Start Saving For Retirement?
Every financial expert out there will tell you the same thing—yesterday. In a perfect world, as you begin earning a paycheck, you begin saving. The earlier you begin to save, the more time your money has to grow. Each year’s gains can generate their own gains the next year, referred to as compounding. Let’s say you start to save at age 25, and put aside $3,000 a year in a tax-deferred retirement account for 10 years, and then completely stop saving.
Assuming an 8 percent return, by the time you reach 65, your $30,000 investment will have grown to more than $472,000. To counter that, if you start saving at 35, and save $3,000 for 30 years, assuming that same rate of return, you’ll have only accumulated $367,000 after investing $90,000. Takeaway? The earlier you start saving, the better.
How Much Money Should I Save Every Year?
The standard advice is as much as you can. Many financial planners recommend that you aim to put aside 10 percent to 15 percent of your income for retirement, starting in your 20s. Many planners recommend having a savings target to help you decide how much to set aside a year to reach your goal.
How Do I Start Saving Money If I’m Not Earning Enough?
Financial planners suggest to not think of savings as something extra to add into to your budget if you can (like, say, that vacation, or pair of shoes) but rather an expense to budget for like rent and the phone bill. If you don’t have a budget, create one. Another trick to make saving seem easier is to make it automatic—like automatically diverging money from your paycheck to your 401K.
And when surprise cash windfalls come around like a bonus or an inheritance, don’t think about it, just stick it into savings.
Where I Should I Put the Money I’m Saving?
Tax-favored retirement accounts such as individual retirement accounts (IRAs) and 401(k)s tend to be the safest places to save for your retirement. Individual plans have different features, but most of them allow you to defer taxes on the money you save and the returns you earn as long as the money stays in the account. Experts do recommend paying careful attention to the fees associated with your plans, so what you are saving doesn’t end up getting eaten up without you even knowing it.