When to Start Saving
Many people don’t begin to think about retirement until they start getting close to retirement age. That’s when they realize that they haven’t set enough money aside to live comfortably after leaving the workforce and end up having to get part-time jobs to supplement their savings. And those who believe that they can live off Social Security quickly find out that the monthly checks barely cover basic living expenses.
So when should you begin to put money aside for retirement? As soon as possible. In fact, it is never too soon to begin saving. Even a little bit of cash invested monthly is a good start. As life expectancy continues to lengthen, having enough money for your golden years is going to become more of an issue.
It’s understandable that people just starting out in the workforce don’t think about retiring. It’s too far off on the horizon. Instead, they are focused on deciding what to do with their lives, establishing a career and starting a family. But even amid all this, they should consider starting some sort of retirement savings. A great place to begin would be with an employer’s 401(k).
Bear in mind that saving shouldn’t put you in financial straits. If you’re having trouble making ends meet and paying your bills, then you should wait until you are more financially secure. You are ready to start saving for retirement when you can:
- Establish a financial emergency fund. This is cash you have set aside for the unexpected car or home repair, loss of employment or natural disaster.
- You aren’t living from paycheck to paycheck.
- You are managing all your long-term debt, such as mortgages, car payments and credit cards.
How Much Money Will You Need?
How do you know if you are saving enough for retirement if you don’t know how much you will need?
Here are three simple steps to help you estimate your retirement needs.
1. Figure out your Discretionary Retirement Income (DRI)
To estimate your DRI, take the annual income you think you need to live comfortably on and subtract those expenses you believe you will not have once retired. For example, expenses such as: payroll taxes, the amount you save now for rainy days, college expenses, etc. If you expect your house to be paid for, subtract your mortgage payments, commuting to work expenses, etc.
What is left over is your DRI. This is not an exact science, but it gives you a good idea of what you’ll need to live on.
2. Estimate Social Security
Contact the Social Security Administration and request an estimate of your benefits. You can also use the Retirement Estimator (http://www.socialsecurity.gov/estimator/) on their website. Based on your projected retirement date (remember that taking retirement at age 70 increases your benefits), subtract this amount from your DRI.
3. Subtract Pensions and Other Income
Add up the money you will receive from your pensions and any current investments. You can get assistance from a financial advisor for this. Subtract this figure from your DRI. If you have other income sources such as: rental property, trust funds, etc., subtract those from you DRI as well.
What is left is the amount you need to make up – per year. Remember, this is an estimate, but it helps you focus your effort on an identified target DRI. You don’t want to be worried about making ends meet after you stop working, so make sure you put away enough money now.
This article is intended to provide accurate and authoritative information on the subject matter covered. It is distributed with the understanding that FBMC is not rendering professional or medical advice and assumes no liability in connection with its use.