How much you need to save for retirement

The Street

Retirement expert Bob Powell joined TheStreet to discuss how much you need to save to retire comfortably.

Transcript

00:00What are the big issues facing retirement savings and retirees?

00:06Like, what are the things that the collective we should be talking about, but we're not talking about?

00:12Yeah, I think the very first thing that at least people, I think, get wrong about retirement

00:16is the need to start saving as early as possible.

00:20The longer you wait, the less you'll be able to take advantage of the power of compounding,

00:26and the more you'll have to save later in life.

00:28When you enter the workforce, you should shoot to save at least 15% of your income,

00:34and then you should try to hit certain benchmarks as you go through your work life.

00:38So at age 35, for instance, you should have maybe 1 to 1.5 times your salary saved in your 401k or your IRA,

00:46and that by the time you hit 65, you should have somewhere between 7.5 and 13.5 times your salary saved for retirement.

00:54Think about starting early and then think about setting these goals for yourself as you hit certain ages.

01:00And how do we scale up as we age?

01:04In terms of scaling up, I would think about it this way.

01:07So I mentioned the benchmarks.

01:08One of the things that you need to also consider is if you're behind the eighth wall in terms of your savings,

01:14you really need to think about, well, maybe I need to save more than 15%.

01:18So for instance, I'll give you a worst case example.

01:21Let's say you are age 60 and you haven't saved a nickel for retirement.

01:27Well, at that point, when you hit age 60, you're going to need to save at least 33% of your income

01:32to make up for what you didn't save when you were 20, 30, and 40 years old.

01:37On the other hand, if you start saving when you're in your 30s,

01:40you will be able to sort of save at a moderate percentage that allows you to, one, fully fund your retirement,

01:47but also be able to enjoy the things in life that you want to, a vacation here and there, saving for college,

01:54paying down student loans, buying a house, buying a second home, et cetera, et cetera.

01:59So it really is a matter of, I think, you know, one of the things I like to say is,

02:04you know, everyone should go back and reread the Aesop's Fable of the Ant and the Grasshopper.

02:10The ant set aside food for the winter months when there would be no food,

02:14and the grasshopper didn't and went begging the ant for food during the winter months.

02:19We need to be more like ants than grasshoppers as you think about sort of, you know,

02:23how I can save for retirement, but also how I can enjoy life.

02:27I guess a gradual approach takes the sting out of actually setting the money aside, yeah?

02:34Yeah, for sure. I mean, again, you might not be able to save 15% of your salary in year one,

02:40but you might be able to save 6%, and then assuming that your employer matches up to half of that,

02:45so you'd be saving at a rate of 9%, which is a really good starting place for many people

02:49who might be in their 20s and who might be, one, trying to pay down their student loans,

02:53trying to enjoy life if they're living in whatever, New York City or Boston or wherever they might be.

02:58And then what you would do is you want to set your 401k plan on something called auto-escalation.

03:04So every year it would escalate from, say, 6% to 7%, 7% to 8%.

03:09And those escalations would be painless in part because with hope you've had a salary increase,

03:14and that one percentage increase in your salary deferral rate won't put a big dent in your sort of standard of living.

03:21So I think that's one thing to consider is auto-escalation.

03:24And also, if you can afford it, every time you do get a pay raise, reevaluate how much you're saving.

03:28Maybe you'd be able to save, maybe save from 6% to 8% or from, say, 8% to 10%.

03:35So, you know, be mindful about the money that's coming in and how you're allocating it

03:39between savings and enjoyment and essential expenses.

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