Rules of Thumb to Save for Your Future

For many of us, retirement is years away, for others it may be right in their rearview mirror. No matter where you are in life, you may wonder if you’re saving enough for when you quit working. Although each person’s situation and goals are unique, considering these simple rules of thumb can help take the guesswork out of retirement planning, so you can develop a winning savings strategy.

The 80% Rule

When you think about your future, it may be a bit fuzzy, especially when you’re trying to figure out how much money you’ll need to live on once you retire. Many financial experts agree that because you won’t have the same expenses when you quit working, you can get by on 80% of your salary. So for instance, if you make $60,000 annually you’d need $48,000 a year to live on when you retire, which would be derived from a combination of income sources such as Social Security benefits, pensions, part-time work, and withdrawing no more than 4% a year from your retirement savings accounts. Figure out what income you can count on, such as Social Security benefits and pensions, and then work toward making up the difference through systematic contributions to your retirement accounts.

The Rule of 72

One of the best ways to build wealth over time is by investing in the stock market, thanks to compound interest. When you invest and keep your money invested, you’ll earn interest and as time goes on, interest on that interest, which creates a snowball effect. The Rule of 72 is a simple formula used to calculate how long it will take to double your investment. For instance, if the average annual returns on your investments is 5% annually, you take the number 72 and divide it by 5%. Using an example of an initial investment of $10,000, it would take you approximately 14.4 years to double your investment to reach $20,000. If you’re worried about investing in the market because of its ups and downs, remember that historical data shows that investors can expect to earn average returns ranging from 4% to 8% annually¹.  A financial advisor can help you focus on your goals and help you decide which investments are right for your situation.

The 10% Rule

It’s one of the most straightforward rules of thumb around: Pay yourself first.  If you earmark 10% of your paycheck toward retirement and set up automatic transfers to your retirement account, it will be money you won’t miss but you’ll reap the benefits later. The earlier you begin, the better. But no matter what your age, regularly contributing to your retirement savings will build wealth over time.

 

¹Source: Ibbotson, Stocks, Bonds, Bills and Inflation 1926-2014

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Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or GreenPath Financial Wellness counselor who can help tailor a solution for you.

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