How Much to Save
How Much to Save — What’s it Going to Take to Reach Your Retirement Income Goals?
Pick a savings target so you know where to aim
Before you can decide how much to save out of every paycheck, you need to have a total savings goal. According to the Employee Benefit Research Institute, only 42 percent of American workers have tried to calculate how much money they will need to save to live comfortably in retirement.1 ING has an online calculator that can help you set a savings target and estimate contribution rates based on different investment returns.
Unlike buying a house or a college education, you can’t borrow to ”buy” retirement.
Balance your financial needs
When you ask, “How much should I contribute to my 401(k)?” the short answer is: as much as you can. That’s not as flip as it sounds. We all have to carefully balance everything that’s competing for our hard-earned dollars. Unlike a house or a college education, you can’t borrow money to “buy” your retirement.
Start by creating a household budget to get a handle on shorter-term needs like saving for a car, a larger home, or college. Retirement savings goes into the long-term column and is probably your most important long-term goal. Some financial experts suggest workers should be saving at least 10 to 15 percent of their pay, but saving even a fraction of that amount is better than not saving at all. You can always gradually increase your contribution percentage as your needs and income change.
Be aware of the limits
If you’re in a position to save larger amounts for retirement, you’ll need to keep an eye on the savings speedometer so you don’t go over the limit. Employer plans often limit contributions to a certain percentage of pay. Once you’ve maxed out your employer match, find out whether you can save even more in the plan. Still have more to save? Consider putting additional savings into an Individual Retirement Account (IRA).
The IRS also sets maximum annual dollar limits for employer-sponsored retirement plan contributions. For 2012, that limit is $17,000. There are different limits for IRAs, so check with your tax professional.
Steady and consistent gets it done
Setting a goal and then keeping it in your sights with consistent savings contributions will give you the best opportunity to live on your own terms in retirement.
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1 Source: 2011 Retirement Confidence Survey, Employee Benefit Research Institute