ONE RULE of thumb says that, if you’re in the workforce, you should save 10% of your pretax income every year toward retirement.
But with both future investment returns and future employment uncertain, it’s probably wiser to save 12% to 15% and to start socking away money as soon as you enter the workforce. By starting in your 20s, you will have a cushion if you later find yourself out of work, and you’ll get greater potential benefit from investment growth.
What if you will receive a traditional employer pension or your employer matches part of your contribution to your 401(k) or similar plan? You might save somewhat less than 12% to 15%. On the other hand, if you don’t start saving for retirement until your 30s or 40s, you will likely need to save far more. In addition, you probably have other goals, such as buying a home or putting the kids through college, and those goals will necessitate additional savings.
Add it all up and you might find you ought to save 20% of your income every year and possibly more. That, unfortunately, is a target few people will hit. But even if your neighbors don’t save that much, maybe you can. In all likelihood, you will never regret the sacrifice and you’ll be thrilled with the results. As you will learn in the sections ahead, by saving regularly starting early in your adult life, you can enjoy a host of advantages—including getting time on your side, saving a bundle in taxes, avoiding all kinds of costs and sharply reducing the nest egg you need to support a similar spending level once retired.
Next: The Earlier, the Better
Previous: Today’s Savings Habits
Article: What It Takes