Putting together a budget and savings plan is undeniably a pain. No one wants to sit there for hours shuffling little bits of paper to calculate how much you spend, how much you earn, and how much you can afford to save. And so many people simply put this chore off, failing to save and thereby dooming themselves to an underfunded retirement.
Painless retirement planning
It’s better to save something than nothing, so if coming up with a precise retirement plan is a deal-breaker for you, the next best option is to fall back on a simplified retirement plan. This system will work for the majority of savers to ensure that they have enough funds for a comfortable retirement.
Step one: Set aside 15% of your income
If you’re still at least a couple of decades away from retirement, then saving 15% of your earnings in a tax-advantaged retirement account during your working life should yield a respectable nest egg. Consider the example of a 30-year-old worker taking home a $50,000 salary. If he gets a 3% salary bump on average each year, and his investments earn an average annual return of 7% during his working life, then saving 15% of his income would bag him $1.7 million by the time he reaches age 65. That’s enough money for a pretty darn nice retirement while still leaving something for the kids.
On the other hand, someone who starts saving at age 45 would need to save $22,797 per year to hit $1 million by age 65, assuming the same 7% return. That’s pretty tough to manage on a $50,000 salary, so if you’re shooting for such a lofty retirement goal, you should consider putting off your retirement a few extra years to give the money more time to grow. Just shifting the retirement date forward to age 70 would give the same 45-year-old a savings goal of $14,776 per year instead of $22,797 — a far more achievable target.
Step two: Put your retirement savings into a tax-deferred retirement account
If you have a 401(k) plan at work, this is really easy to accomplish: Simply ask your HR representative for the 401(k) contribution paperwork and fill it out specifying that you want 15% of your wages to go into the 401(k). Some 401(k) trustees will let you set your contribution percentage right on the brokerage website. You’ll also need to decide which investments to funnel your 401(k) savings into — more on that in a moment.
Because this money will come out of pre-tax income, you’ll even save some money on your Social Security and Medicare taxes. Your contributions will also be spared from income tax,…