- There are many different rules that determine how much you should save for retirement.
- According to CFP Colin Overweg, it’s simple: just save 20% of your income.
- Keeping it simple allows you to enjoy another 80% of your income while you are young and stress-free.
There is no one specific way to achieve your retirement goals, and different people have come up with different methods that work for them.
Some retirement strategies, especially those associated with the FIRE movement, can be quite drastic at times. These workers sometimes resort to super-saving strategies in order to save as much income as possible, or put in a lot of work to maximize their income, the typical FIRE savings rate is 50% of a person’s income.
Other advice on how to speed up your retirement savings is to take a side hustle. Some people see this approach — having multiple income streams — as ideal because it often allows people to move from full-time to part-time jobs, allowing them to focus on the things they care about, but sometimes it can also lead to burnout.
On the other hand, some people have very little retirement savings.
A 2021 study by Vanguard shows that the average 401(k) account balance is close to $130,000, but the median is just over $33,000. That means some people have a lot of money in retirement accounts, which greatly raises the national average, but the average worker has very little savings.
This is especially true for Gen X workers now in their 40s and 50s, but with little to no savings. According to a 2019 survey, only 47% of Gen X Americans have a retirement account to begin with.
How much you need to save for retirement will largely depend on your age, current income, personal needs and location. That said, most people use some general rules of thumb to determine how much they need.
One is the 25x rule, which states that you need to multiply your required annual income by 25 to know how much you need to save for retirement.Similar guidelines are 4% rulewhich indicates that your annual withdrawal rate should not exceed 4% of the total amount in your retirement account if you want it to last through your retirement.
and others, like ideas you should at least have Save a year’s salary at 30or your contribution rate should increase as you get closer to retirement.
However, according to Colin Overweg, a financial planner with an all-virtual practice in California, he recommends a rule of thumb for most retirement savers: Use 20% of your income each year for retirement and the remaining 80% for retirement. % of income, whatever you want.
Why you should save 20% of your income for retirement
Most importantly, Overweg says, establishing a consistent 20% savings rate is all about successfully building a savings habit.
“For most people, the real wealth creator is continuous savings,” Overweg said. “It’s not a one-off event where you were lucky enough to buy a stock that didn’t have a great investment performance.”
He said the reason he thinks 20% is an ideal savings number is because it’s a sustainable number that can be saved for about 25 to 30 years and still allow future retirees to be where they need to be financial management. Command stopped working.
“In a broad, very common scenario, you need to save about 25 times your expenses to achieve financial independence,” Overweg said, adding that by checking this rule and working backwards from it, 20% is an ideal savings number.
“Twenty percent of people in about 25 to 35 years of work would agree with that,” Overweg said. “If you start saving 20% at age 30, you’ll be financially independent around age 55 or 60.”
When it comes to saving for retirement, the sooner the better. Compounding interest that you can earn on savings as early as your 20s can snowball on your account balance, sometimes to the point where you saved enough when you were young, even if you don’t contribute any other funds to your account for the rest of your life, you There’s still enough money to retire in your 50s or 60s. This is sometimes called coastFIRE.
But starting your retirement fund in your 30s doesn’t mean you can’t retire in time — you just need to start as soon as possible and be consistent.
Why you should enjoy the remaining 80%
One of the things Overweg also recommends is that if you save 20% a year, it’s important to “enjoy the other 80%” of your income.
“Some people can be so focused on their budget and stay within that budget and still not be able to retire,” Overweg said. “Why are you so worried about getting what you pay for? Put 20% in a long-term wealth accumulation account and enjoy the rest—now your budget is ready for you.”
Overweg described his approach to retirement planning with clients as “holistic” and said he emphasized retirement is a number, not an age, and that reaching retirement numbers can be achieved in a number of ways.
“It’s easy for consultants to say — ‘No, you’re not on the right track, you have to be able to retire before age 62,'” Overweg said. “And I’d get someone to counter that they love their job and want to work part-time for the rest of their lives. If that’s the case, I think the consultant would say ‘no, we’re not going to run the numbers, you still need to save more .”
Overweg cites Ramit Sethi’s best-selling personal finance book “I will teach you to get rich” And said that as a financial planner, it was more important to him that His clients live ‘richest lives’ In their 20s, 30s, 40s, and 50s, than follow a complex and restrictive savings plan that doesn’t actually meet their needs.
“It’s not about listening to customers, and it’s not about making plans that will allow them to live their best lives now and in the future,” Overweg said.