How Much Do I Need to Retire?

When to start saving for retirement

Ideally, you will begin planning for retirement from the moment you begin working: “There’s no substitute for getting an early start on saving,” says author and financial editor Walter Updegrave. A lot of financial advice recommends budgeting as the beginning point of retirement savings, however, one problem with budgeting is that you run the risk of only saving what’s left over after you have spent the money allocated in your budget.

If you want a more specific number for your retirement savings, look online for a retirement savings calculator.

Instead of budgeting, young professionals should prioritize savings in a way that makes sense to them: “The first thing you should do is save,” Updegrave says. Whether you save 10 percent, 15 percent or another amount that makes sense to you, put your savings in a 401(k) or mutual fund. “Take it right off the top,” says Updegrave, so you can force yourself to live on less than the amount of income you actually make.

While this is sound advice for people at any age and career level, starting your career with this mindset will make it easy to adjust to a certain standard of living. It will be significantly more difficult to try this later in your career when you effectively give yourself a pay cut by putting more cash into savings every month.

Updegrave advises people to think of retirement as “a living bill you have in the future,” one for which you are simply putting money aside to pay later. This can be a great way for you to make saving for retirement a priority rather than an afterthought. “The biggest thing is to start,” adds Sophia Bera, author of the e-book What You Should Have Learned About Money, but Never Did: A Gen Y Guide to Empowered Finance and founder of Gen Y Planning, which is an investment firm dedicated to serving millennials. Once you get started by opening a Roth IRA or 401(k) and setting up your monthly contributions, your money will start adding up.

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Saving vs. investing money for retirement

A successful retirement plan will include both savings and investments. Here’s a breakdown of why each of these retirement vehicles matters and how you should use them as you advance through your career years:

While savings accounts provide security, they typically offer low returns. A diversified investment portfolio can help you grow your wealth while managing risk.

• Retirement savings accounts: Savings are lower-risk than investments and can be thought of as cash equivalent vehicles, including money market accounts, CDs and savings accounts. While you want to have some money set aside in savings, these are not avenues that will, in the long run, make you a lot of money. That’s why it’s important to combine savings with investments to build your nest egg and have enough cash in the bank when you’re finally ready to retire.
• Retirement investments: Investments are higher risk than savings vehicles, although the amount of risk they pose depends on the type of investment. Generally, people will make riskier investments early in their careers, then move their money to lower-risk investments as their career advances and they start thinking more and more about retirement.

  Stocks are the most common and popular form of investments, and in general, they should make up part of your retirement portfolio. Learn how to buy stocks to maximize the chances of investing wisely, and keep in mind that investments are riskier than savings for the potential for a higher return – a high return isn’t guaranteed, which is why you do not want to put all of your money in high-risk investments.

» MORE: Best and worst cities for retirement

How to catch up on retirement savings

There are a lot of reasons people put off saving for retirement. Going to graduate school, working minimum wage jobs and/or jobs without a company 401(k) option, taking time off from the workforce to take care of kids or aging parents, or just simply not thinking about it are all common reasons people neglect to save for retirement. If you fall into this category, the bad news is that you can’t recoup all the money you lost by not saving earlier in your life. The good news, though, is that you still have options. Here are three things to start doing immediately if you are worried about having enough for retirement:

How to retire on little money

If you are ready to retire and don’t have enough retirement savings, “there are always things you can do to improve your situation,” explains Updegrave. Some things to consider if you are near or at retirement age but don’t have the nest egg you need for a full retirement include:

• Downsizing to a smaller house, condo or apartment
• Taking in a renter
• Moving to a part of the country with a lower cost of living
• Considering a reverse mortgage on your home

The retirement experts we spoke with seem to all agree on one thing: delaying retirement for one or more years might be all it takes to keep yourself comfortable enough to retire for good. “Delaying retirement can have a really big impact,” says Updegrave. Wes Moss, author, and host of the popular radio show “Money Matters,” encourages people to think of taking a “junior retirement” before fully retiring, meaning you would work part-time doing something you enjoy. Junior retirement can be a great intermediate step to bridge the gap between full-time employment and full-time retirement.

Many people are choosing to take a step back from their working roles without fully retiring, and we should expect to see this trend continuing with Gen X and Gen Y. Bera predicts that the current trend of retirees turning to what she calls an “encore career” when they reach retirement age will continue with future generations. Millennials especially seem to be thinking about their future when they choose to work in a company that rewards them with opportunities to learn new skills and move into different positions within the same company. Knowing they aren’t going to be able to just work for 30 years and retire, millennials are more invested in finding companies that allow them to grow and have the potential to be fulfilling for 50 or more years.

However, just because the average retirement age for millennials is predicted to be 73 as opposed to today’s retirement age of 65 doesn’t mean millennials should plan to work until they are in their mid-seventies. “Don’t put yourself in the position where you have no choice,” warns Updegrave. Start saving and investing now so that you have options in the future.

Retirement mistakes to avoid

There’s no one way to build a retirement plan, but there definitely are things you should avoid in order to meet your retirement goals. Avoid these common mistakes as you get closer to retirement:

• Saving big projects for your newfound free time: It’s very common for people to put off renovations for years, decades even until they are retired, focusing largely of the time they will have to put up with a renovation instead of thinking about the financial burden of such a large product. Try to tackle renovations and other big ticket items while you’re still working so you know you have the income stream to handle the financial burden.
• Not planning for market downturns: Instead of preparing for ups and downs in the market, a lot of people make the mistake of thinking the market’s going to stay steady. There are going to be great years and there are going to be years when the market dips. The key is to transition from investing to saving as you move closer to retirement so dips in the market don’t disrupt your plans when you are ready to retire.
• Thinking they have time to save later: Not saving enough and not getting started enough are two big mistakes people make when planning for retirement. Even starting small when you are in your twenties will pay off compared with waiting until you have a bigger paycheck, thanks to compound interest. Aim to save 15 percent of your income if you start saving in your twenties and more if you start saving later.
• Making plans based on things that are out of your control: A common mistake among retirement savers and investors is they plan their retirement based on factors out of their control, like the market staying steady or getting a massive inheritance to cover a significant portion of their retirement expenses. Take full ownership of your retirement planning so you can be prepared for things that are out of your control.

Bottom line

There’s no denying that retirement has changed drastically over a generation, and it will continue to do so for future generations. The one thing that hasn’t changed is the need to plan ahead so you can retire when you’re ready without suffering a major financial setback. Start saving and investing in your retirement now if you haven’t already, and start contributing more money into your retirement account(s) if you are worried you won’t have enough.