Are you saving enough for your pension?

Saving for your pension is not easy. Many people struggle to pay today’s bills, let alone put extra money aside in an investment account for tomorrow. As such, it’s not surprising that more than 60% of Americans worry that they won’t have enough money for their old age, according to a recent AARP survey.

There are a few ways to approach this. You can aim to save a percentage of your income. You can also set a goal based on the amount you think you’ll need and then work backwards. A financial advisor can help you create a retirement plan that is tailored to your needs.

Answer these questions to find out if you’re saving enough.

1. Do you save 15% of your income?

Fidelity’s analysts believe that if you contribute 15% of your income between the ages of 25 and 67, you can build a large enough nest egg to live comfortably once you retire. So if you make $60,000 a year, the idea would be to put $9,000 of that into your retirement account. As your wages increase, so does the amount you throw away.

It helps if you have a 401(k) and your employer matches some of your contributions. Let’s say your employer matches every dollar you put in up to 4% of your salary. In the example above, this would mean that you could contribute €6,600 and your employer would contribute €2,400.

Knowing what is enough: According to this logic, you are on the right track if you invest 15% of your salary from the age of 25. If, like many of us, you start later than age 25, you’ll need to set aside a higher percentage. of your salary.

2. Are you getting the most out of your tax-advantaged premiums?

If you don’t have access to a 401(k) through work, you can use an individual retirement account (IRA) to get tax benefits on your retirement savings. There are a number of different types of IRAs and there are limits on how much you can contribute each year. The maximum total contribution you can make to your IRA in 2024 is $7,000 ($8,000 if you are over 50).

Broadly speaking, a traditional IRA will lower your tax bill today. With a Roth, you contribute after-tax dollars and can make tax-free withdrawals once you retire. The great thing about Roth IRAs is that investments can compound tax-free, so you don’t have to pay taxes on your gains. There are also IRAs designed for freelancers and small business owners.

It’s easy to open an IRA. The best brokers for IRAs have a broad mix of investments, low fees, and accessible tools. Some brokers, like Robinhood, will even match some of the money you put in. Click here to learn more about Robinhood’s 1% IRA match and open an account.

Knowing what is enough: If the idea of ​​retirement planning is already giving you a headache, start by maximizing your IRA contributions. There is no one-size-fits-all pension figure, but it is unlikely to be sufficient on its own. Yet taking that first step is sometimes half the battle.

3. Do you know how much you need?

We can use several rules of thumb to estimate retirement needs. One says we will need about 80% of our income for early retirement once we stop working. So if your salary is $60,000 a year now, you may need $48,000 when you retire.

You don’t have to withdraw the entire amount from your investment portfolio; other income streams (such as social security) will also make a difference. For example, if you got $20,000 from other sources, you would need to take $28,000 per year from your retirement fund.

So how big would your portfolio need to be to pay $28,000 plus inflation every year for the rest of your life? This is where another financial guideline – the 4% rule – comes into play. The idea is that you can safely withdraw 4% of your fund in your first year of retirement. You can then withdraw that amount, adjusted for inflation, for the next 30 years.

So to earn $28,000 in your first year, the calculation would look like this:

• Amount year 1 ÷ 0.04 = Pension fund objective
• $28,000 ÷ 0.04 = $700,000

Knowing what is enough: In the above scenario, you need a fund of $700,000 to retire comfortably. Do your own calculations to figure out how much you might need and how close your current contributions will get you.

In short

If all the math and estimates seem overwhelming, don’t let that stop you from investing. The most important thing you can do is get started. The more years you invest, the more compound interest can work in your favor.

Start by contributing at least 15% of your salary to your retirement account. You can then try to increase that amount every year. And as you get closer to retirement, talk to a financial planner or use a retirement calculator and reexamine your contributions.