Do you have enough savings to retire when you want? The answer is: probably not. According to the Employee Benefit Research Institute's 2010 Retirement Confidence Survey, 54% of American workers report having less than $25,000 in savings and investments, and 27% have less than $1,000 saved.
With the future of Social Security uncertain and pensions on the wane, these workers may face a painful reckoning when their paychecks dry up.
Retirement Savings Needed Can Vary Greatly
What if you want to be financially well-prepared for your retirement--how much will you need to save by the time you stop working? There are many variables that can affect this answer. Inflation may push your living costs up even through your retirement years. As people live longer, you may face decades of retirement. And your golden years may come with expensive medical costs you can't predict now.
You'll need substantial savings to not only survive but thrive in retirement. How much is enough?
Expenses During Retirement
One rule of thumb is to assume you'll need 70% of your current income to live when you retire. That's just a quick estimate, though. You'll want to actually think through your expected expenses during retirement.
Some costs will be lower than when you're working. Your kids will be grown when you retire and (hopefully) supporting themselves. If you own a home, you'll have paid off your mortgage or close to it.
On the other hand, retirement might mean other costs actually go up, depending on your lifestyle plans. If you're longing to travel the world after you've quit your day job, factor the costs of that trip into your savings plan now.
Most Americans find their expenses go down a bit in retirement, but make sure your expectations line up with your dreams, so you can plan accordingly.
Getting to a Number
You can find plenty of good online calculators to get an idea of how much money to save for the future. The Motley Fool offers two useful ones: one estimates your post-retirement expenses, and one determines if you're saving enough.
Retirement might seem like a long way off if you're young, but saving early comes with huge advantages. Even small contributions made to a savings account, 401(k), or IRA while you're young can compound to big savings by the time you hit retirement age.
In contrast, if you wait until you see the end of your workdays on the horizon to start saving, you'll need to commit a much larger portion of your current income to reach that goal.
When you think about retirement planning, take into account your whole financial life. Will you qualify for a pension after retirement? Will your spouse? What other benefits will you receive? What assets do you have? Consider money you have in savings accounts as well as in more traditional investments, like your 401(k).
Once you have a good picture of where you are, and where you want to go, the road map should be fairly easy to draw. Your best retirement savings strategy is simple: live below your means, and consistently put money aside for the future.
Balancing Retirement Savings with Other Savings Goals
While you sock money away for retirement, though, don't neglect other healthy financial habits. Before you put all your savings into retirement accounts, build up an emergency fund large enough to cover six months' (or more) of living expenses. This will protect you from an unexpected financial crisis today, which is just as important as saving for the future.
Research the best savings accounts, because the highest interest rates offered by banks can be significantly better than average savings account rates.
Saving for retirement might seem boring, but it should be as simple and automatic as brushing your teeth: something you do every day, a little bit, without even thinking about it. You'll thank yourself when you're older.