When it comes to your money, one of the most important decisions you will make is how you go about saving for retirement. It can also be one of the trickiest decisions too. The good news is, you can stay on track with your saving by following some simple retirement milestones.
Savings Goals by Age
Most people save a part of their income (typically 15 percent ) for their retirement. This is fine if you are young and have many years left for saving. But, what happens when you are trying to catch up on your retirement savings or if you began your retirement savings very early?
Well, you can see if you are on track by checking out age-based savings milestones. Your retirement savings goal is broken down by your present salary amount that you needed to have already saved up at certain ages.
Savings Milestones Guidelines by Age
Below is a retirement savings guidelines to help you set yourself up with a secure retirement. Remember, these are guidelines, and your retirement savings may be more or less than what the table advises. Keep in mind, that you have the opportunity to “catch up” if you see you are falling far behind the recommended milestones.
- By age 30 - 1x your annual salary
- By age 35 - 2x your annual salary
- By age 40 - 3x your annual salary
- By age 50 - 6x your annual salary
- By age 55 - 7x your annual salary
- By age 67 - 8x -10x your annual salary
Your specific circumstances will vary, of course.
Power of Compounding
Compound interest works the best over longer periods of time, particularly in growth investments like stock mutual funds within a 401K or an IRA account. The earlier you invest, the more time compounding has to make your money work for you by generating interest, requiring you to save less of your earned income at a later date. If you have a tax-deferred account, your investment earnings aren’t taxed until you withdraw them, typically at retirement.
In the earlier decades, your savings will double slowly at first. In later years, your money will then begin to grow faster since you will now be doubling higher dollar amounts after you have been investing for a while.
Compounding Works like Magic
For effective retirement saving, the key is to begin early to allow your money over time to earn money by itself. For instance, if you invest your dollars wisely, it will earn a potential seven percent. At seven percent, within 10 years, a single dollar will double. In an additional 10 years the $2 will now double to $4. Ten years more and you are up to $8 and so forth.
Milestones before Retirement
Starting your 401K
This happens when you start your first job. If you have a 401K plan option in your workplace, take it. This will allow you to start getting that tax-free compound interest working for you.
Age 50 and Beyond
If you have slacked over the years in putting money away in your 401K plan, this is the time where you can play catch-up to make up for the time you lost. You can increase how much you contribute to your retirement plan and even add an extra $5,500 to your contribution limit if you are over 50 years old.
Age 59 1/2 and Beyond
It is at this point that you can begin withdrawing from your 401K retirement plan penalty-free. If you are younger than 59 1/2, you will pay a 10 percent penalty for early withdrawal. You will also have to pay income tax on the money you take out.
Age 70 and Beyond
At this age, the government requires you to start taking your IRA and Social Security disbursements. If you have been diligent about adding money into your 401K plan and have not made any withdrawals, this could be where you can finally bank on your saved money and have a great retirement. You can withdraw your money from your 401K plan and begin living the life you have always dreamed about.
If you follow these guidelines, you should have around 8 to 10 times your ending salary by retirement age. You can then replace 85 percent of your pre-retirement income, which is far better than trying to save up a million dollars.