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A Simple Guide to Planning for Retirement

The single biggest mistake 9 out of 10 retirees make is not having enough savings in place. In fact, over a third of Americans have less than $1,000 saved for retirement. As people are beginning to stay in retirement longer, Medicare and Social Security plans are running thin, leaving it on you (and only you) to properly save for your golden years.

If you’re planning on retiring in the next 20 years, or in the next 2, here’s what you need to know.

How to Plan for Retirement

Because everyone’s circumstances are different, there’s no one set way to efficiently plan for retirement. In fact, a number of outside factors should be considered, including your current savings, how much you’re hoping to save, your projected rate of return, and how long you plan on staying in retirement.

Michael Kitces, co-founder of the XY Planning Network and publisher of the financial blog Nerd’s Eye View, says the key to saving for retirement is starting slow and working your way up. According to him, “it’s a challenge to save more for retirement, because doing so requires giving up on some current spending. And for some of us, there’s no room in the current “budget” for cutting to free up money for retirement savings!

“Try committing that when you get your next raise, you only spend half of it. Don’t worry about cutting your spending now. But when that next raise comes, whether it’s your cost-of-living adjustment, or a promotion, commit to only spending half of the raise.

“And while this kind of strategy may feel like a slow way to make progress, it can actually have a very big impact over time. In fact, just spending 50% of every raise can actually give you almost three times the retirement savings of just saving 10% of your income every year.”

How Do You Catch Up If You’re Starting Late?

While starting your retirement savings early will certainly give you a leg up on how much you’re able to save, starting later in life doesn’t have to put a limit on how much you’re planning on putting saving. James Molet, financial and retirement expert over at Retirement Savvy, believes the key to saving starts with your defining your end goals:

“It is possible to retire if someone starts later. However, the reality is that they will have to contribute at a greater rate the later they start to meet the same retirement objectives. Unfortunately, there does a come a point – which will vary for each individual based on their current age, their desired retirement age and their income – when they will not be able to meet an earlier retirement objective. An individual can only contribute so much of their income to savings/retirement plans and if they wait too late, there simply will not be enough time to meet an earlier goal. In such cases, they should still save for retirement; however, they will have to lower their retirement goals.

“The first step is to establish a spending plan to track expenses over a given time period, three to four months at a minimum. Doing so will reveal two critical pieces of information: the total expenses relative to income and the current income allocation. With that information in hand, you’re ready to seize control of your financial life.”

How Much You Should Save

As the key to retirement is starting early, a common question is “How much should I be saving?” Short answer: as much as you can. The long answer is a bit trickier. Generally, a good rule of thumb is to put away 10% of your income into a retirement fund. For instance, if you make $40,000 a year, $4,000 should go directly towards retirement.

Another aspect to consider is how much you should be contributing to your various retirement accounts, as the interest you accrue in the accounts will inevitably be the deciding factor on when you feel you’re ready to retire.

Jason Vitug, founder and CEO of Phroogal, stresses this point. According to him, “If your employer offers a Defined Contribution Plan such as a 401(k), make sure you’re enrolled into the program and contributing at least the minimum amount that your employer matches. Each year increase your contribution by 1 percent or more in line with any performance or merit-based pay increase. Contributing to a company’s 401(k) is an easy way to allocate pre-tax dollars into a retirement account which makes it harder to withdraw.

“It’s never too late to save so if you’re not saving then it’s time to start today. No excuses. The close you are to retirement age the more money you’ll need to save in order to have enough funds during the period of your life when you are unable to physical work. It is possible to retire but the comfort level is reduced and the lifestyle hindered.”

The key to saving for retirement is defining clear goals. By actively making and sticking to your savings plan, you’ll be able to beef up your savings and learn financial habits that will last a lifetime.

For more retirement advice, also see:

Retirement and 401k

Retirement Advice to Prepare for Your Future

What Are the Average Retirement Savings by Age?

How Much Should You Be Saving for Retirement?