Saving enough for your retirement shouldn't be a big, scary, seemingly-impossible thing to do.
The first thing you need to know, of course, is how much do I need to retire? After all, you have to know what your target is if you're going to be able to hit it.
How much you need is a number that I like to call your Freedom Figure.
Once you know what that amount is, we can advance to the next step - how to get there from where you are now.
How to save enough for retirement
First, you have to get your head above water and that means following the steps to getting out of debt. (Steps 1-9)
Second, you need to have enough money in your emergency fund to give you a nice cash cushion. (Step 10)
Third, you need to save, save, save. Saving is the name of the game when it comes to retirement, especially if you would like to retire early! (Step 11)
The more aggressively you can save for retirement, the better. At a minimum you should save 20% of your pre-tax income. That will allow you to save enough over the course of a 37 year working career to retire on. You take the cash and invest it.
If your employer says they pay you $50,000 per year, you need to save $10,000 per year, minimum.
- That's $833 per month or, if you get paid every two weeks, its $385 per paycheck.
As you save even more, your retirement accounts will grow even faster, and the number of years that you will have to work and save is shortened.
If you save 25% it drops to 32 years. 5 years less than a 20% savings rate!
If you save 30% it drops to 28 years. 4 years less than a 25% savings rate!
If you save 35% it drops to 25 years. 3 years less than a 30% savings rate!
If you save 40% it drops to 22 years. It keeps dropping in a non-linear fashion the more you save!
If you save 45% it drops to 19 years.
If you save 50% it drops to 17 years.
If you save 55% it drops to 14.5 years.
If you save 60% it drops to 12.5 years.
If you save 65% it drops to 10.5 years.
If you save 70% it drops to 8.5 years.
If you save 75% it drops to 7 years.
If you save 80% it drops to 5.5 years.
If you save 85% it drops to 4 years.
If you save 90% it drops to under 3 years.
If you save 95% it drops to less than 2 years.
Check out Networthify for a tool to let you calculate this for yourself, using your own numbers!
As you can see, the most important factor in determining both how much you need and how long you will have to work in order to save that amount is your savings versus spending ratio.
If you spend less and save the rest, you can retire earlier on less money.
Every time you choose to spend money, think about that!
Do you really want to finance that new car?
Is it really worth working a longer career to wait in line at Starbucks for your morning coffee?
You're allowed to brew your own!
You're allowed to brew your own!
Check my numbers:
If you make $50,000 per year and save the minimum (20%) of your gross ($10,000) you will have a working career that is 36.7 years in order to save up enough.
If you cut out the Starbucks and save and invest the difference (just $500 per year, $9.62 per week),
YOU CUT A YEAR OFF YOUR WORKING CAREER!
YOU CUT A YEAR OFF YOUR WORKING CAREER!
How good does that coffee taste now?
Whoa!?
Whoa!?
Is that sound I hear the sound of you slashing your cable bill? Good!
How to save enough for retirement?
Simple.
Cut out unnecessary expenses and petty luxuries until you can afford to pay for them out of your passive income from your investment account(s). Until you have enough, you save, save, save.
Once you have stuffed enough money into your investment account(s) that you have reached your Freedom Figure, you can do whatever you want!
Want to keep working 'cause you love your job? Cool! (This is me!)
Want to reduce your hours? That's great!
Want to volunteer? You can!
Want to work part-time at the store that serves your hobby? Go!
Once you reach that point you can save the extra, or spend it on the luxuries that you want, or whatever! You're totally free to do whatever you want!
You're in control for the rest of your life!
You're in control for the rest of your life!
