Creating an appropriate asset class allocation will help move you toward your retirement goals. Choosing the right funds to fit within your investing strategy will streamline your journey. But, without the right saving strategy, all the fund picking in the world won’t get you to the goalpost.
Before you worry about which mutual funds are best for you, focus on the act of saving. Choose to spend some quality time selecting the right contribution amount for now and developing a long-term saving strategy that involves future contribution increases.
So how do you know how much to contribute? Generally, you should save 10-15 percent of your income for retirement; however, each individual will have specific needs. A general amount may not be right for you. Building a hefty retirement account is one of the most important things you can do with your money. The size of your retirement nest egg will govern if and when you can retire. It will dictate where you can travel, the hobbies you can enjoy, the gifts you can buy, and every other financial decision during your retirement years.
There isn’t a singular correct answer to the retirement savings dilemma because we all have different goals for retirement. For example, someone who wants to retire at age 55 in order to travel the world golfing probably needs to save more than someone who wants to retire at 70 and stay home to focus on gardening. Start figuring your savings rate by understanding how much money you’ll need to live the retirement lifestyle you want. There are online calculators that can help. You’ll probably need to know a few things to input for the calculator. For instance, for how many years will you be retired? Do you plan to work during some of your retirement years? If so, in what capacity? Do you plan to increase, decrease, or maintain your current standard of living?
It’s also useful to estimate costs for big-ticket expenses like travel.
Then you can figure out how much your monthly contributions should to be in order to reach your needs. Again, online calculators are very useful. You’ll probably need to know a few things to input for this calculator also. How much money have you saved already? How many years will you continue to work and contribute to your retirement accounts? What’s your investing profile? In other words, are you more conservative or aggressive as an investor?
Communicate with your spouse or partner if you have one, and decide how his/her current and future retirement savings will interact with yours.
If you don’t plan to spend time calculating your saving rate, there are some general rules of thumb to use. If your company has a match, start there and increase your contribution each year by one or two percent. And, as I mentioned earlier, if you can, aim for a 10-15 percent saving rate each pay period.
When you have a number—your monthly contribution—you have to determine whether you can afford to make that contribution, understanding that a “contribute less” verdict could reduce the probability you’ll have the retirement you envision. Coming to terms with the math can be a wakeup call.
Remember that a traditional contribution will reduce your taxable income, and that will affect your budget in a positive way. Still, if your current budget won’t accommodate the contribution you need, you’ll have to either change your retirement expectations or make changes to your current budget and lifestyle. The only wrong answer is no answer at all.
With information in hand, it’s time to take action. Update your current contributions with your company, and create a plan for increasing the amount over time. You should know what you have and where you’re going as your work takes you closer and closer to retirement.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.