While thinking about what you’ll do in retirement may be fun, making financial plans for your later years definitely isn’t for most people. In fact, according to the 2020 Modern Wealth survey conducted by Charles Schwab, 44% of Americans describe saving enough for a secure retirement to be a significant source of life stress. This is up from 38% in 2019.
It’s not surprising people are more worried than ever about investing for the future, especially in light of recent stock market volatility — not to mention the fact the country is officially in a recession. But rather than worrying about saving for retirement, it’s best to be proactive in making sure you’re on track. And to do that, there are two key steps to take.
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1. Determine the amount you need to save for retirement
Far too many Americans haven’t yet calculated how much they’ll need to save for the future. This uncertainty can be a source of concern in and of itself if it leaves you with the nagging sensation you’ll never have enough.
The good news is, setting retirement savings goals is easy. There are a few different techniques, but one of the simplest is to estimate your final salary (by taking your current income and assuming a 2% raise each year from now until retirement), then multiply that number by 10. If your final salary will be $55,000, you’d want a retirement nest egg of $550,000.
After you’ve got your big number in mind, use an online calculator to break it down to the amount to save per month. If you’re retirement date is in 30 years, you’d need to invest about $450 per month to hit your $550,000 target, assuming a 7% average annual return.
You also have the option to save a certain percentage of your income instead of a specific amount. Many people find this easier than contributing a flat amount to hit your goal since contributions rise along with your salary. However, if you start investing when you’re young and save enough to hit your target goal, even if that means investing a substantial percentage of your salary when you have few responsibilities, the effects of compound interest mean you can save much less over time and still end up with enough.
Most experts traditionally recommended saving 10% of your salary if you choose to go that route, but it’s best to save 15% instead due to longer projected life spans and lower projected future returns compared with historical rates.
2. Automate your investments
This step is the hard one, but it’s the one that’ll pay off: Set up automatic investments for the amount needed to hit your goal.
If your plan is to save $450 per month or 15% of your income, automatically transfer that much on payday. Of course, you may find you don’t have enough money to do that right now. And that’s OK. Many people are in this situation now so if you’re one of them, start saving something, even if it’s just 1%.
Then, work up as quickly as possible to automatic investments for the amount you need. Options that can help you do that include finding a side hustle and devoting the money to retirement savings; improving your skills and asking for a raise, then contributing the entire extra amount; making budget cuts; or simply notching up the percent you’re contributing over time as you get used to living on less.
The key is to make the process automatic, because if you have to choose to save, chances are you’ll pay for other things first and it won’t get done. You owe it to yourself to make retirement savings a top priority, and automatically investing can be the simplest way to do that. The sooner you get started, the less stressed you’ll be.