If you're in your 40s or older, maybe you're a little bewildered about how much money you'll need to retire. Maybe you're not aware of how much money you need for retirement, or the idea of saving such a large sum is overwhelming? Don't worry – you still have time to save enough if you implement a solid plan.
- If you're in your 40s or older, you may be wondering how to save for retirement. There are four tips that can help.
- First, reconsider your savings needs. Then, take a look at your current income and think about how you can increase it if needed.
- Next, consider your future income. Finally, consider whether delayed retirement could be a good option for you.
Shovel as much money into retirement savings as you can. If you start saving for retirement in your 20s, the general rule of thumb says that you can get away with saving only 10 percent to 12 percent of your take-home pay.
If you're starting in your forties, the general rule of thumb says you need to increase your savings rate to 15 percent to 20 percent.
Does that sound daunting? Then try this: rather than focusing on the percentage of your take-home pay that you should save, decide how much money you want to live on per year during retirement. Multiply by 25 to figure out how much you need to save.
To live on $40,000 per year in retirement, for example, you'll need $1 million in your retirement portfolio.
A million dollars may sound like a lot but remember: You don't need to earn $1 million at your 9-to-5 job, you just need to grow $1 million through your investments.
The most critical factor to help you achieve this is a long time horizon. The longer your money is invested in a retirement fund, the more it is likely to grow. In fact, with an aggressive savings strategy, you can create a $1 million portfolio in as little as 17 years to 20 years.
Why? In a nutshell, the longer your money is invested, the more you can take advantage of compounding interest. After enough time passes, compound interest will allow you to double or triple your money.
If your current job doesn't pay enough to enable you to save $1,500 to $2,000 per month or more, consider finding ways to earn money on the side.
Small amounts make a big impact. If you can earn an extra $100 per week – perhaps by consulting, teaching, or freelancing – and can also trim an additional $100 per week from your spending habits, you'll save an extra $10,400 per year.
In addition to earning more, spending less, and building your $1 million portfolio, you can also look for sources of income in retirement.
Some retirees who are mortgage-free rent out their homes or part of their home to long-term tenants or those looking for short-term online vacation rentals. They use part of the rental income to pay rent at a cheaper location, then live on the remainder.
There are a myriad of ways to earn extra money while you're retired. You could also teach classes, consult, run a daycare, or work as a nanny.
If you're in your 40s, you still have enough time to amass a $1 million portfolio, as you have around 25 years left until your retirement date.
But if you're in your 50s or 60s and you realize you've dramatically underfunded your retirement portfolio, maybe your only option is to keep working.
Unless your boss or your health forces you to retire, stay in the workforce for as long as you can. Each additional year working provides you with more money you can save for retirement and gives your investments more time to grow.