How To Start Retirement Savings

One of the things that comes up in financial planning is that getting all of the information and facts can be difficult. This, all too often, leads to financial paralysis where you don’t end up doing anything at all, because you don’t understand all the details. Ironically, a lot of the information that ends up being “too much,” is for edge cases that don’t affect the average American saving for retirement.

How To Start Saving For Retirement Now

retirement planning how much

Retirement savings, investing, and planning is one area where complicated topics can needlessly paralyze people from taking action. Occasionally, financial companies themselves accidentally cause this confusion.

Not long ago, I was talking with someone about retirement savings. The issue, for this particular person was the commercial talking about “Your Number.” If you remember this commercial, the point was that you should know how much money you will need when you retire. The goal, was to get you to schedule an appointment with one of their financial advisors or brokers to find your number. Since the person I was talking to didn’t know his number, he was stuck on what to do for retirement.

The ironic part is that you don’t need to know your number in order to start saving for retirement. Far from it. Actually knowing your so-called number is both unnecessary, and unrealistic. For starters, most people are years away from retirement and any number would be calculated based on assumptions that will be literally decades out of date by the time you retire. In addition, calculating your number really just serves to warn you that you aren’t saving enough, so waiting is exactly the wrong thing to do.

I once started the most basic financial plan. I need to revisit that. In the meantime, let me give you some core knowledge about retirement planning that can help you get unstuck and start moving forward. In fact, if you want to skip the rest of this post, just go straight to my World’s Easiest Retirement Plan.

What If I Save Too Much Money for Retirement?

First, the good news is that it is almost impossible to save too much money for retirement.

…it is almost impossible to save too much money for retirement.

Let’s back up a second and calculate a super rough retirement number. Most experts consider the “safe” withdrawal rate from a retirement nest egg in order for it to last you for life to be somewhere around 4 percent, or 5 percent. For easy math, let’s go with 5 percent.

If you have $500,000 nest egg, that means you would get $25,000 in income during retirement at a 5% withdrawal rate. How does that make you feel?

Is that how you imagined your retirement? Sitting in your house carefully budgeting out that trip to the supermarket?

Forget that!

Let’s get some more retirement income.

To get $50,000 per year in income takes a $1,000,000 nest egg. You thought a million bucks would go a lot further didn’t you?

Don’t forget, thanks to inflation $50K won’t be as much money in 20 or 30 years. So, you’ll want at least $75K to replace what $50 grand is today.

That takes $1.5 million.

If you want to travel in a way that doesn’t include an RV, and you might like to go to some Broncos games, or take the family on a cruise when you retire, you’ll need well north of $2 million when you retire.

If you save $1,000 per month for 20 years and earn 9% return, that gets you a nest egg of around $675,000. Didn’t we say you need more than that?

Saving $2,000 per month will get your $1.3 million. That’s good, but it’s hardly “over-saved”. You can’t save all of that into your 401k though because of IRS limitations.

How about saving $3,000 per month?

Now, you’re talking. That’s just over $2 million or a $100,000 a year income in retirement (probably worth about $70K to $80K in today’s dollars.)

So, let’s break it down. You need to max out your 401k, max out your IRA contributions, AND save a bunch more money on the side in order to even come close to getting what you want in retirement, let alone saving too much money for retirement. If you are already doing that, look for my upcoming series on transitioning to being wealthy.

If that’s not you, then what are you waiting for?

Start putting money in your 401k plan now!

How much?

How much you got?

Seriously.

You need $3,000 per month to get a six-figure retirement income. If you can’t do that, then put as much as you possibly can in your 401k plan starting right now.

Boom! Retirement planning done.

Where should you invest your money in your 401k plan?

That answer will matter soon, once you have some money actually in there, but if you are starting at $0 up to around $25,000, it really doesn’t matter all that much yet. Look for a S&P 500 Index fund or something similar and just start putting it in there.

We’ll talk diversification and asset allocation soon…

Until then, get going. Time is wasting and the math only gets harder the less years you have until retirement, because compound interest is slow.

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