How to Save for Retirement

February 13, 2023

It is never too early to start planning and saving for your retirement years. But how much do you need to save and how do you figure out how to save for retirement?

There are a lot of details to understand about saving for retirement and how that works. There are also a lot of routes you can take to save for retirement. It is an important thing to think about so that you can create the best retirement saving plan for you and meet all your personal retirement goals.

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Retirement Definition

What is retirement? Retirement is a withdrawal from the workforce or from someone’s career. People usually enter a state of retirement in their senior years when they are ready to stop working. This is a way for senior citizens to leave the workforce so they can relax and enjoy their senior years.  

But retirement does not happen magically. Entering retirement is something someone can do because they planned for retirement years in advance and took several measures to plan and prepare for retiring from the workforce one day.  

What is Social Security?

Social Security is a federal government program. A portion of taxes get put into a government trust fund. These Social Security funds are then available to people who have retired, have a disability that keeps them from working, or for dependents who have lost the support of a recently deceased loved one.  

Social security is a part of where our taxes go and is meant as a security fund for those who really need it. As you pay taxes, you increase the credits you have toward receiving social security benefits one day when you retire.  

What is a 401K?

401Ks are employer-sponsored retirement plans. They are called "401Ks" because they refer to an Internal Revenue Code.  

401Ks are not just retirement plans you can get from your employer; they are also a way to save for retirement that benefits your taxes each year. The money you put into your 401K each year does not get counted as taxable income. This means you will end up paying less in taxes and can possibly get higher tax returns.  

401K plans allow you to pay a portion of your income to your retirement plan. That way you can start saving for retirement without having to put money aside yourself each month. Employers will often also match what you put aside in your 401K, which will help you save for retirement faster.

What is an IRA?

An IRA is an Individual Retirement Account. An IRA is like a 401K but instead of being sponsored by your employer, IRAs are sponsored by the IRS.  

IRAs are also tax-deductible, meaning the funds you put into your IRA do not count toward your taxable income when you file taxes each year. But this will also depend on what kind of IRA you have.  

How Does Retirement Work?

Retirement consists of several steps and actions you can take in the earlier years of your career that will set you up to be able to retire in the later years of your career. These steps and actions mostly consist of the type of retirement accounts you can have and the ways you can contribute to those accounts.  

Step 1: Set Up a Retirement Account

The first thing you will need to do to retire someday is to research the different types of accounts you could use to hold and build your retirement savings. Each one comes with different pros and cons. Some accounts will charge income tax now while others will charge income tax later.

Different providers will also come with a different rate of return or savings rate for the account.  

Step 2: Contribute to the Retirement Account

Once you have your retirement account set up you can start contributing to the account on a regular basis. Make automatic monthly payments to help grow toward your savings goal. Use an account with a high savings rate, or growth percentage, that will automatically grow over a prolonged period of time.

Your work might also have a retirement program like a 401K where you can contribute money directly from each paycheck. Some employers will even match or help add to your savings account too.  

Step 3: Retire

Most of the work in retirement is in the years leading up to retirement when you are contributing to your savings accounts. With a great investment strategy, you will be able to save up enough money to spend in retirement so you can eventually stop working.  

How Much Do I Need to Retire?

According to many financial advisors, how much you need to retire is about 80% of your pre-retirement income. To figure out how much you need a month in retirement, consider how much you need each month now in today’s dollars, and reduce that amount to 80%. For instance, say you need $5,000 a month in your life right now. 80% of $5,000 is $4,000 so you can expect to need about $4,000 a month in retirement.  

Current Monthly Income x 0.80 = Suggested Monthly Income for Retirement

5,000 x 0.80 = 4,000

How Much Money Do I Need for a Retirement Home?

To get the most accurate pricing for how much you need for a retirement home you will want to research retirement housing in the area you want to retire in. Then adjust those prices with inflation using the US inflation calculator. Otherwise, some research suggests that on average retirement homes can cost between $1,500 and $10,000 a month.

How Much Money Do I Need for Medical in Retirement?

Depending on your health, the cost of healthcare in retirement can be expensive. Even if you have medical insurance during retirement, you may still need to pay for part of your healthcare costs. The Fidelity Retiree Health Care Cost Estimate says that if a retired couple wants to retire at 65 then they will want to save about $285,000 for potential medical costs.  

A great way to save for medical in retirement is to enroll in a Health Savings Account (HSA) health plan with your employer. This is like a retirement plan specifically for medical needs in retirement.  

Average Retirement Savings by Age

As a rule of thumb, it is a good idea to have certain retirement savings goals in mind. This will help you have something tangible to work toward. First, start thinking about when you would like to retire. What age you retire will play a role in how much you will need to save.  

How Much Money Do I Need to Retire at 65?

How much money you need for retirement will depend a lot on how much money you currently make. For instance, the typical full-time worker in America made about $49,764 a year in the first quarter of 2020.  

As an example, someone who makes $50,000 a year will generally want to have 80% of that $50,000 a year income as their yearly retirement income. That means someone who makes $50,000 a year now, will need about $40,000 a year in retirement.  

Current Yearly Income x 0.80 = Suggested Yearly Income for Retirement

$50,000 x 0.80 = $40,000

If you want to retire at age 65 and want around 30 years of retirement money saved up, then you'll need to work toward saving a total of $120,000 in order to still have $40,000 a year in your retirement.  

Suggested Yearly Income for Retirement x 30 years = How Much Money You Need to Retire at 60

$40,000 x 30 = $1,200,000

How Much Money Do I Need to Retire at 60?

The sooner you want to retire the more you'll need to save for retirement. So, the only difference in your retirement saving calculations here will be for how long you'll need retirement income.  

For example, if you want to retire at age 60 then you'll likely want retirement savings that can last you around 35 years. Let's consider you're the same person who makes $50,000 a year now, then you'll do the following calculations to find out how much you need saved to retire at 60.  

Suggested Yearly Income for Retirement x 35 years = How Much Money You Need to Retire at 60

$40,000 x 35 = $1,400,000

How Much Money Do I Need to Retire at 55?

If you want to retire even earlier, say age 55, then you'll want to account for even more retirement years. If you want to retire at age 55 and want around 40 years of retirement money saved up, then you'll need to work toward saving a total of $160,000 in order to still have $40,000 a year in your retirement.  

Suggested Yearly Income for Retirement x 40 years = How Much Money You Need to Retire at 55

$40,000 x 40 = $1,600,000

How Much Money Do I Need to Retire at 50?

Retiring at age 50 is very early. On average, people tend to retire at age 65. But if you do want to retire at 50 years old, then it'll be a good idea to save at least 45 years of retirement savings.  

Suggested Yearly Income for Retirement x 45 years = How Much Money You Need to Retire at 50

$40,000 x 45 = $1,800,000

How Much Money Do I Need to Retire at 40?

Retiring at age 40 might seem like the ultimate dream, and if you plan accordingly and save a lot now, it might work! The hard part of retiring so early is that you'll need around 50 years of retirement money put away.  

Suggested Yearly Income for Retirement x 50 years = How Much Money You Need to Retire at 40

$40,000 x 50 = $2,000,000

Just remember, simple calculations like this don't account for things like down-scaling your living situation, not having monthly debt and loan payments anymore, the potential costs of healthcare in your old age, changes in the market, or inflation. To know exactly how much money you need for retirement consult a finance professional or use a retirement savings calculator.

In Conclusion,

When saving for retirement, remember that life can be unexpected. You might need emergency spending for medical expenses or other sudden expenses. Or you might need discretionary spending for vacations, traveling, gifts, or hobbies. Ultimately, the key to saving up for retirement is to start today and sit down frequently to think practically about your future, even if retirement seems far away right now.