The saver has absolute control of their situation.
How do you find $20 to save?
You would think in the Saver section, we would focus on the inside of your bucket, but here is the dilemma.
If you are 30 or 40 years away from retirement and the outside of your bucket is not fully painted, it is almost impossible to determine your annual retirement needs. Therefore, it is not easy to choose a savings rate to appropriately fill your bucket.
As you get closer to retirement, it will become easier to see what is on the outside of your bucket and determine what's needed on the inside. But if you haven't had time or haven't saved appropriately, it may be too late to fill your bucket.
In the Spender section we talked about creating a budget, determining areas where you could trim, taking those dollars and saving them. The byproduct of managing your spending is that you now control how much you save each year. You're in control, you own it, and you carry it. Does that sound like the "handle" of your bucket? Yes it does, so save, save, save. But how much?
How much should you be saving each year is an excellent question that has two very different answers.
1) At the most basic level, the amount you need each year in retirement multiplied by the number of years you will have in retirement will determine the balance that you will need. The amount you will need will determine how much you need to save each year. Investment returns (both pre- and post-retirement), other sources of income during retirement, inflation, pay increases and many other factors will also figure in to the determination of your annual saving needs.
2) Save as much as you can now and figure out a way to increase those savings each year.
For now, we like answer #2 better. It seems a little bit easier on the brain. In the Planner section we will go into greater detail.
But whatever you do, don't "chicken out". It might be easy to say 3% or 4% of pay is as much as you can do. But, is that really all you can do? Do your current wants really outweigh your future goals? If you're starting a family, saving to buy a home, reducing debt, it may not be that easy to save much more than that right now, but keep looking for ways to increase your savings rate!
You know you need to get started saving and you know you need to get started now. Maybe you can't afford to save 5% or 10% of your pay right now. Why not get started at a level where you do feel comfortable, then find a way to increase your savings each year by 1%? Many of the retirement plans we work with at NestEgg U offer an automatic 1% increase or a voluntary 1% increase ("Bump It!"). By staying in these programs, in no time at all you will be saving more than you thought you could. And if your plan doesn't offer either, put it on your calendar to increase your salary deferral percentage by 1% each year. Your bucket will thank you.
A few years back, there were two students here at NestEgg U, one a Cheerleader and the other the Quarterback of our football team. We were very proud of both as they graduated at the same time and both got great jobs.
The Cheerleader decided to save $100 each month for 10 years. While she was saving, the Quarterback was spending. Cars, sunglasses, clothes. He had it all. After 10 years, the Quarterback had $0 saved and decided it was time to save for his future. The Cheerleader told him how much she had saved, so he started saving $100 a month. Funny thing, when HE STARTED, SHE STOPPED.
|Savings Years 1-10:||$12,000||$0|
|Savings Years 11-40:||$0||$36,000|
It's now time to retire. Who has more money? Part of the answer has to do with the next section of NestEgg U, the Investor. They both had the same investment returns (7% per year), so neither has an advantage. What the Cheerleader gets with her retirement balance is the power of time. You don't get the advantages of power of time if you wait to start saving. A savings balance of $0 multiplied by even the best investment return is still $0.
|Account Balance in Year 40:||$135,044||$121,288|
You knew she was going to have more money; it wouldn't be a good story if she didn't. In fact, if they continued on in the same fashion, the Quarterback would catch her in year 61. The moral of the story is this: It's the power of time. Start early. You can't get the time back - for savings or for investment return.
We understand it is a daunting task to save for retirement. The simple rule of thumb is to save as much as you can now and then continue to increase your savings every year to meet your goals.
Download this simple worksheet to help determine the percentage of pay you need to save. Remember, if you don’t know what you spend, you won’t know how much you will need for retirement.Download Worksheet
There is a limit on the amount of elective deferrals that you can contribute to your 401(k) plan.
401k Elective Deferral Limit for 2016: $18,000
A plan may permit participants who are age 50 or over at the end of the calendar year to make additional elective deferral contributions. These additional contributions (commonly referred to as catch-up contributions) are not subject to the general limits that apply to 401(k) plans. An employer is not required to provide for catch-up contributions in any of its plans. However, if your plan does allow catch-up contributions, it must allow all eligible participants to make the same election with respect to catch-up contributions.
Catch-Up Contribution Limit for 2016: $6,000