How much do you need to retire?

Posted on February 24, 2016 in AdviceSaving Money

Ask MyDobot: How Much Do I Need to Retire?

“Hey MyDobot, I’m 26 years old and already dreaming of retiring and traveling the world someday. How much money do I need to retire and make that happen?”

Great question—and great that you’re asking it now rather than 20 or 30 years from now. Not only is it smart to start saving for retirement as early as possible, it’s also pretty fun (and motivating) to think about all the things you want to do when you don’t have to work anymore.

You’ve probably heard a lot of doom and gloom in the news about how Americans aren’t saving enough for retirement. This may be true—but it doesn’t have to be you.

The first key to retirement savings success is not to put your head in the sand about it. The second key is not to overcomplicate it. I’ll share some tips for how to do that a little later in this post.

But first, let’s cover some of the basics of finding your magic retirement number.

How much money do I need to retire?

The general rule of thumb is that you should save enough to replace 70% of your pre-retirement yearly income if you want to maintain a similar lifestyle post-retirement. And because of ever-growing life expectancy rates, it’s best to plan on funding at least 30 years of retirement, or more if you plan to retire early.

Of course, it can be tricky to determine what your “pre-retirement income” will look like if you’re many years away from actually retiring (here’s hoping it’s in the seven-figure range, am I right?). And expenses will shift, too—for example, you may have a mortgage payment now or at some point in your life, but hopefully it will be paid off by the time you retire. On the other hand, seniors tend to have higher healthcare expenses, so you’ll need to allot more in that category.

This is one place where it helps to not overcomplicate things. You could break out the spreadsheets and fill them with assumptions about your future income and expenses, or you could use an online retirement savings calculator to give yourself a ballpark figure to work with. Chances are, this number is going to change over time anyway, so it’s largely hypothetical at this point. The main objective of this exercise is to convince you it’s time to start saving money.

How do I get there?

If you’re like most early savers, your magic retirement number probably seems heinously large and unattainable—which isn’t exactly motivating. But here’s the part where you shouldn’t put your head in the sand. The earlier you start to save something—anything!—the better off you’ll be.

Most financial planners recommend saving 10 to 15 percent of your yearly income for retirement, starting in your 20s. Don’t be discouraged if you started late and/or your financial situation makes it impossible to get there right away—just start with what you can, and make it a goal to increase the percentage of income that you’re saving by a little each year.

There are also a few things you can do to make your money multiply with very little effort on your part. For example, if your employer offers a 401(k), aim to contribute at least as much as your company is willing to match—a 401(k) match is the definition of free money. Even if you don’t have access to a 401(k), you can use a tax-deferred individual retirement account (IRA) to allow your money to grow over time without paying taxes on the investment gains until you withdraw the funds at retirement.

Financial blogger Zina Kumok recommends the Roth IRA as opposed to a traditional IRA for millennials. With a Roth IRA, “you contribute money that’s already taxed, so when you withdraw from the fund later in life, you don’t pay any taxes on the money.” A traditional IRA, on the other hand, allows you to contribute pre-tax dollars, then taxes your distributions when you take money at at retirement. Since most young people will see their income climb before retirement, a traditional IRA can mean paying taxes at a time when your tax bracket is higher.

Baby steps add up

It’s easy to get overwhelmed by the daunting task of saving for retirement, but the worst thing you can do is set this topic on the shelf for another year (or five) before doing anything about it. Start with one small thing and let the momentum build.

And you’re not alone—I’m here to help! The Dobot app is a great way to start saving money quickly and easily. Once you connect me to your checking account, I’ll automatically transfer small amounts of money to your Dobot savings account without you having to think about it (and before you’ll have time to miss it). Before you know it, you’ll have saved a sum you can be proud of—and that can be a powerful motivator in getting the rest of your financial goals on track.

Download the Dobot app today, and start seeing what your savings can do for you.

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