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How Much Should You Save for Retirement?
Having enough money when you’re older is important, but that’s tomorrow's problem. Many small business owners don't exactly plan on retiring in the traditional sense, but what we can do is make continuing to work optional. Why does saving for retirement get overlooked so often? It may be that it was never talked about, or maybe it feels overwhelming, it’s easy to call it tomorrow's problem. You want to make good financial decisions, we’re here to help.
Saving for Retirement: Tomorrow's Problem
Saving for retirement might seem like a distant concern, but it is important to start as early as possible. Tomorrow’s problem turns into next week's problem, next year's, or even next decade's problem. It is important to think about these things though, the power of compound interest means that the money you save today will grow exponentially over time. Think of it this way: starting your retirement savings yesterday is ideal, but the next best time to start is today. The longer you push it off, the harder it becomes to reach your goals. What I dislike seeing most is no action being taken at all.
How Much To Save For Retirement
Your savings rate is the percentage of your income that you set aside for the future. While there is no one-size-fits-all answer, a common benchmark is at least 15% of your gross income for retirement. What the heck does that even mean? Is that a benchmark in your 20's, what if you're in your 40's? How long are we saving for? What are we investing in? How much do we need in order to make work optional? There are a lot of factors to consider, and if you want to play around with the numbers, you can do that here: IRS Compound Interest Calculator. I have some problems with a lot of these super long-term projections, but what if we started by comparing our savings rate with our peers and getting an idea of where we are at?
Savings Rate vs. Investment Returns
Look, I get it, everyone wants a higher rate of return. The fact of the matter is that your savings rate plays a more significant role in building your retirement fund (or any savings goal for that matter) than people give it credit for. You have more control over how much you save compared to the returns you earn on your investments, which are subject to market fluctuations. Focusing on consistently saving a higher percentage of your income can have a more substantial impact than chasing slightly higher returns.
Spending vs. Saving
One of the biggest challenges many people face is the tendency to spend money before saving it. It's easy to justify expenses, especially when they seem essential to your business or lifestyle. Business owners will often make purchases primarily for the tax deduction, which I feel is a mistake. This often leads to a cycle where saving for retirement gets pushed further down the priority list. We all know someone who didn’t save enough for retirement and now faces financial struggles. It's a sobering reminder that consistent saving, even in small amounts, can make a significant difference over time.
Financial Planning
Projections are likely to get less and less accurate the further out we look. Why not focus on things we can control today? If you struggle to save for retirement or other goals, here are some quick tips.
· Automate savings – pay your future self first
· Review Regularly
· Get professional advice
Your savings rate is just one factor in your financial life. Let's use some real objective measures to be more intentional with our financial decisions. Where is your money actually going? Money flows through one of four channels:
Savings Rate: How much of your income is being set aside for goals, including retirement.
Debt Rate: How much of your income is used to pay liabilities, mortgages, and loans.
Tax Rate: How much of your income is going to Uncle Sam.
Burn Rate: How much of your income is used for your cost of living.
Knowing these numbers is just one way to help facilitate meaningful financial conversations. Remember, the actions you take today matter more than trying to predict every future variable. Let's start by understanding where we are, where we want to go, and have real, meaningful conversations. Learn more and schedule a FOCUS introduction call today.