How much money should I be putting away for retirement?
There is not a blanket answer to this question. Obviously the goal is to put as much away for retirement as possible.
A recent actuarial report states that to live in retirement with 75% to 80% of your current income, we need to save between 8% to 12% of our current income.
To determine what is right for you, ask yourself these questions:
- Do I have 3 to 6 months of emergency money saved in addition to my retirement savings?
- Are there non-essential expenses that I can cut back on?
- Will I really miss an extra 1% or 2% of my pay?
These questions will help you determine your personal plan for retirement savings.
How do I calculate those numbers?
Go through your checkbook, credit card statements and cash receipts and see where your money is currently being spent. Try to cut "flexible" expenses, such as utilities, groceries and entertainment by 5% to 10%. Once you have your final expenses for the month, separate out the expenses that are necessary for basic living and multiply by 3 to find the minimum you should have saved for emergencies. If you don't have this amount, don't panic, you will just need to put a little more toward this fund each month.
Now What?
Now that you know where your expenses are going, you can better determine how much of your pay you can put into your Retirement Plan.
What if I can only afford to put away 1% of my pay?
Any amount that you can save toward retirement will benefit you in the long run. Your contributions are taken from your paycheck before Federal and State taxes are applied. Therefore the portion of that money that would have gone to Uncle Sam will go into your Retirement Plan.* For 2005 you may put up to the IRS maximum of $14,000 in your Retirement Plan or $18,000 if you are at least 50 years of age.
*Savings into a Retirement Plan are tax deferred. You will pay the taxes when you take the money as a distribution.
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