Most Americans aren’t saving enough for retirement, the latest data shows. Financial journalist Brian Stoffel has compared Transamerica data on what Americans of different ages actually save with Fidelity guidelines for what they should be saving, and he found that Americans start to fall behind in their 30s as living expenses mount up.
At 35, you should have saved up $54,000, but most people have only saved $45,000. By 45, you need $162,000, but most only have $63,000. By 65, when you should have built up a nest egg of $432,000, most people only have $172,000. Combined with Social Security, this only leaves retirees $22,500 a year for living expenses. To avoid spending your retirement in poverty, the best strategy is to start developing a savings plan now.
Setting Savings Goals
A first step toward developing a savings plan is setting some financial goals. Knowing what you’re saving toward lets you know how much to set aside. The American Institute of Certified Public Accountants recommends thinking about your needs for each stage of life when setting financial goals. For instance, if you just graduated from college, paying off your student debt and starting your retirement plan might be major goals. If you’re planning to get married and have kids, you and your spouse should discuss your mutual financial goals, including both your retirement plans as well as issues such as separate vs. joint savings accounts, insurance and educational funds for children. If you are looking to buy your first home, saving up to afford a mortgage becomes an important goal.
In addition to such long-term goals, financial planning experts recommend building an emergency savings fund as a safeguard in the event of unemployment, injury, illness or unexpected expenses. Wells Fargo recommends saving up at least three to six months of your salary at a minimum. In today’s economy, saving for nine or 12 months isn’t a bad idea.
Creating a Budget
Once you’ve established some goals, you need to establish a budget so you know how much to save per month to meet your objectives. Charles Schwab provides an online calculator you can use to estimate how much you need to save monthly for any particular goal given your target amount, how fast you plan to achieve your goal, any additional contributions you can make beyond your monthly deposits and your annual return rate.
To create a realistic budget, estimate how much you can afford to save per month based on your income. As financial journalist Laura Shin explains, a simple way to budget many experts recommend for beginners is the 50/20/30 rule. Following this rule, put 50 percent of your monthly income toward fixed expenses such as rent and car payments, 20 percent toward saving for financial goals and paying off debt and the remaining 30 percent can be used toward variable discretionary expenses such as dining out and entertainment.
Sticking to Your Budget
After you’ve set a budget, the trick is sticking to it. The best way to do this is to set up one or more dedicated savings accounts separate from your other accounts and set up automatic direct deposits from your paycheck. Apps such as Simple can help you set up direct deposits and manage them in accord with your budget.
To finance your savings, the best strategy is to take advantage of your employer’s 401(k) plan if it offers one and saving the maximum contribution that your employer can match each month. If your employer doesn’t offer a 401(k), AARP recommends exploring alternatives such as IRAs, bonds, a permanent insurance policy or survivorship insurance for couples.
Spending less should be another important part of your budgeting strategy. Frugality expert Kristen Cross recommends adopting simple cost-cutting strategies such as renting instead of buying when possible, eating in more often and lowering your energy usage.
Finally, to avoid having your savings go toward paying interest, avoid debt as much as possible. FICO spokesman Anthony Sprauve recommends you don’t run up your balance on your credit cards higher than 10 to 20 percent of your limit.
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