As wealth advisors, we sometimes spend more time thinking about numbers and planning and savings strategy than we do for other things, even football. We also spend time highlighting holidays that others might not notice, such as this week’s America Saves Week.
While it’s always good practice to regularly save for the future, the issue has taken on even more spotlight in the past year as we’ve seen some volatility in the global markets and also the job market.
And while saving in general and having an emergency fund is key, one of the most frequently asked questions we hear – and one of the top Google searches – is:
“How much should I save for retirement?”
Having retirement savings goals and a plan to get there will help you face your future with confidence.
Contributions to Retirement Plans
A savings strategy for retirement has become much easier with the creation of defined-contribution plans such as a 401(k) you may have access to from your employer.
You select a percentage or dollar amount to come out of your paycheck. On pay day, the money moves to the retirement savings account, and those funds are invested for you (you can select how they’re invested); magically, you are saving for retirement!
But how much should you be putting in there, and what’s your end goal of dollars saved before you retire? There is no hard and fast rule, but studies over the years have shown that on average you should be saving about 10 percent of your current income, while you are working. In the last few years, we have seen experts in longevity change their 10 percent recommendation to closer to 15 percent. Since we are living longer as a society with better health care, technological advances, and folks making important wellness choices, it’s likely we’ll need to save up a bit more to be prepared for more decades of life after retirement.
Step Ladder Method
If you are not saving at those percentages, try a process we call the “step ladder method.” Each year, you should push yourself to try to increase your savings strategy rate by 1 percent. It is a much easier method than trying to make a larger increase all at once. Similar to using a step ladder, you want to take one step at a time. As anyone who is trying to stop a bad habit as a new year resolution has probably learned, it is easier to make small changes to lifestyle then to go cold turkey and try to stop the habit. Small changes over time add up to a very large savings rate.
Variable Expenses and Budgeting
Another way to increase your savings for retirement is reviewing your household budget. While it may sound onerous, budgeting can have a dramatic impact on your overall savings rate.
When determining your budget, you want to focus on two major types of expenditures. The first type is fixed expenses which include mortgage or rent payments, car payments, real estate taxes, and health care costs. These are items we need, and typically we cannot change the cost of, in our everyday lives.
The second expense type is variable expenses, which change from month to month since they are based on our wants at that time. Types of variable expenses could be entertainment, ordering takeout, clothing, groceries, and home improvements. Typically speaking, variable expenses are most likely to override a budget if you do not plan accordingly.
A good method each month is to designate a percentage or a dollar amount towards your variable expenses by breaking down each category. This will give you more control to see where you are spending your hard-earned dollars. An example of a variable expense that has become a norm in our homes is subscription-based entertainment (If you have any good Netflix recommendations, please send them my way!). One of the trends we have seen with the pandemic are how we can subscribe to many different entertainment services and channels, which has been extremely built-out in the past year. Often once we have caught up on the shows we wanted to see, we continue to pay for the service even though we may not be using it. These monthly fees start to add up and take away from our savings goal.
It’s a Balance
Creating a budget to track your expenses will help you achieve your retirement savings aspirations. Budgeting can also help pay off debt, which could allow you to increase your savings over time. While a savings strategy can help you achieve financial freedom, debt can often bring financial stress. Trying to reduce your debt over time will dramatically free up cash flow that can be utilized towards your retirement savings objective. This might take a few years to achieve because balancing your needs for the present and future is a marathon and not a sprint. If you implement small changes today, your future self will thank you for these changes.
Saving for retirement is one of our biggest focuses at Domani Wealth, helping clients plan for tomorrow. It’s rewarding to see our clients reach retirement age confident in their future. If you’d like to feel more confident in your retirement savings plan today, we’re always available to start a conversation. Call us at 855-855-5455 or email us at [email protected].