Save This Much Of Your Paycheck For A Comfortable Retirement (And Even Retire Early!)
It’s a tale as old as time: if you’re trying to build your financial life, you’ve probably had people in your circle, or financial pundits online, tell you to save for retirement. It’s an easy piece of advice, but how much should you be saving?
The imprecise answer is always more than what you’re currently putting away. While vague, the reality is that Americans aren’t saving for retirement. An October 2022 Bankrate survey noted that 55% of Americans feel that they haven’t saved enough for retirement, with nearly 35% saying they were significantly behind.
The general rule of thumb among many financial professionals is to aim to save 15% of your gross income in retirement plans such as a 401(k) or IRA. This number will allow you to have a solid chance of maintaining the same quality of life in retirement.
But what does 15% actually mean? And what will the end result look like when you’re ready to leave the workforce? Here’s what you need to know.
How to build a retirement nest egg
Typically, workers that earn W2 income from a job will use their 401(k), or other similar employer sponsored retirement plan, to automatically put away funds from their paycheck. You can also open up an IRA (individual retirement plan) on your own to put away additional dollars for retirement.
However, the secret to building a comfortable retirement cushion has very little to do with your income during your working years. It has more to do with how much you set aside, and invest, while you’re actively earning income.
Here’s a quick example of this:
This is because of the law of compound interest, which is when your money begins to grow over time, and your earnings begin to earn as well — creating a compound effect. And the beauty of compound interest is the more you pour into it, as well as giving it as much time as possible, you can grow your nest egg for a well-funded retirement.
But what if you don’t want to work for the majority of your life, and want to retire early? In recent years, the FIRE (financial independent, retire early) movement has become quite popular for those on the fast track to leaving the workplace behind.
FIRE movement, and how to put your retirement in hyperdrive
The FIRE movement rose in popularity after the 2008 financial crisis as a new way to approach personal finance. This thought process is to live on much less than you make, bury your money away in investments and be able to leave the workforce much earlier than the standard retirement age of 65.
There is no one right way to reach financial independence, so it’s worth researching in forums like Reddit to see how other people approach this way of exiting the workforce earlier. But here are two example of how you could do it — based on the 4% rule at a 8% rate of return:
To achieve FIRE, both Andrew and Leilani are putting a significant portion of their annual income away in assets that are projected to grow over time. This is a prerequisite to achieve early retirement. However, if you don’t have the desire to retire early, that’s perfectly fine.
But if you want to give yourself financial flexibility, while also enjoying your life now, consider this strategy.
- Max out your IRA each year
- Max out your Health Savings Account (HSA) with funds invested each year
- Max out your 401(k) or other employer-sponsored retirement plan
- If you have more money left over, put as much money away in a taxable brokerage account
This is a strategy I’m currently using, with the goal of investing ~30% of my W2 income each year. By doing this, I’m projecting that I’ll be able to retire around 55 years old. However, be sure to sit and create a retirement plan that fits your needs and wants for a happy, healthy life after your working years are over.
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