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5 Rules of Thumb for Retirement Savings


Saving for retirement can be a daunting challenge for many. The landscape is filled with many retirement plans and investment companies vying for your attention, along with complex contribution restrictions, tax rules and paperwork. Overcoming these challenges becomes achievable when you utilize proven rules of thumb to set yourself on the path toward a financially secure retirement. If you need some guidance navigating your retirement savings journey, it’s advisable to consult with a financial advisor. Their expertise can assist you in creating a suitable retirement plan tailored to your specific needs and goals.

Rules of Thumb for Retirement Savings

Incorporating time-tested rules of thumb can significantly ease your retirement planning efforts. These guidelines, honed over years of financial wisdom, act as valuable signposts to help you make informed decisions and achieve your retirement goals. With that said, here are several retirement rules of thumb that can pave the way to a more secure and prosperous retirement.

1. Start Saving Now

The Chinese proverb wisely states, “The best time to plant a tree was 20 years ago. The second-best time is now.” This sentiment holds true, particularly in the context of retirement savings.

Ideally, you should have started saving right after earning your first income. But life happens and many of us get caught up in those short-term needs like car payments, fun outings with friends and college expenses.

But, even if you didn’t start back then, you can start now. No matter your age, there is always time to start saving for retirement. So, start getting those seeds planted and watch your money grow with compound interest. The earlier you start, the more time you have for your money to grow before you reach your golden years.

2. Aim to Save 10% to 15% of Your Income

According to the 2023 Employee Benefit Research Institute’s retirement confidence survey, there has been a decline in American workers’ confidence in having sufficient funds for a comfortable retirement, dropping to 64% from 73% in 2022. Furthermore, 62% of workers are grappling with the challenge of debt.

If you need to adjust your retirement savings plan due to challenges like debt or rising costs, consider the 10% to 15% savings rule as a helpful starting point. This rule suggests you save between 10% to 15% of your income, including any contributions from your employer.

This rule is an excellent starting point for folks in their 20s or 30s. However, if you start saving later in life, you may need to increase this percentage to align with your retirement goals. Remember, the ideal savings percentage varies depending on your unique circumstances. It also depends on other factors like life expectancy, current spending and saving habits and lifestyle choices for retirement.

Consider using a retirement calculator to determine a suitable saving percentage for your situation. The calculator can provide valuable insights into whether you are on track to achieve your savings goals by inputting your monthly expenses, saving contributions and income.

3. Minimize Investment and Bank Fees

The size of your retirement savings is greatly influenced by how much your investments cost.  These costs typically arise from expense ratios charged by mutual funds and exchange-traded funds (ETFs), as well as commissions for buying and selling.

The expense ratio, an annual percentage fee, is a continuous charge for holding a fund. For instance, if you have $10,000 invested in a fund with a 1% expense ratio, you’ll pay $100 in fees annually. You can easily find a fund’s expense ratio on investment research websites like Morningstar or on the company’s website that offers the fund for sale.

As a rule of thumb when choosing a fund, aim for an expense ratio as close to 0% as possible. However, it’s reasonable to consider paying closer to 1% for certain types of funds, such as international or small-cap funds.

To minimize commissions, you have two straightforward options: opt for commission-free investments and embrace a buy-and-hold strategy. Avoiding frequent trades can be a prudent approach for retirement planning.

In addition to investment fees, it’s important to be mindful of pesky bank fees that can erode your retirement savings over time. To avoid these fees, consider choosing no-fee or low-cost accounts, maintaining the minimum balance and minimizing transactions within the account.  

4. Steer Clear of Investments You Don’t Understand

If you’re new to investments and only feel comfortable with a savings account, that’s okay. While you’re learning the ropes, it’s wise to park your money there. As you gain confidence, you can explore slightly more sophisticated options like index funds and ETFs, which are often sufficient for building a solid retirement portfolio.

Remember, don’t let salespeople or advisers pressure you into investing in something you don’t understand. While their intentions may be good, they could be motivated by commissions rather than your best interests. Take the time to educate yourself about various investment choices to make informed decisions.

Even seemingly simple investments like bonds can become tricky if you need more understanding. Without grasping how bonds work, you may fall prey to making emotion-driven buy-and-sell choices based on short-term market news rather than focusing on the long-term value of your investments.

In the world of finance, knowledge is power. Furthermore, take the time to educate yourself, ask questions and gain confidence in your investment decisions. Building a secure financial future with investments that align with your understanding and long-term goals is essential.

5. Adopt a Long-Term Investment Strategy

Adopting a long-term investment strategy, such as a buy-and-hold approach, significantly reduces the frequency of commission payments on your investments. This also means you won’t allow emotions to dictate your investment decisions.

Emotions can lead people to make poor choices, like buying high and selling low. For instance, they might be enticed to invest in a soaring stock, not realizing its growth was achieved over the years and they might miss the boat on potential gains. Conversely, during an economic downturn, people may panic at the sight of falling markets and hastily sell their S&P 500 index fund at the worst possible moment.

Research has consistently shown that keeping your investments intact during even the most challenging market downturns tends to be a more successful strategy. Over the long haul, you’ll reap greater rewards by leaving your portfolio untouched through market ups and downs compared to those who react impulsively to news or attempt to time the market.

Ways to Boost Your Retirement Savings

A couple confused about the rules of thumb for saving for retirement

In addition to these guidelines, there are several strategies you can employ to boost your nest egg. To boost your retirement savings, consider implementing some simple tactics:

  • Create a budget. Effectively managing your money leads to reaching retirement goals. Tracking expenses helps cut unnecessary costs and curbs impulse purchases.
  • Automate your savings. The easiest way to save money is by setting up automatic deductions from your checking account to a savings account, handling the process effortlessly. While savings accounts are excellent for quick access to cash during emergencies, consider exploring other long-term savings options as they may offer higher interest rates to keep up with inflation.
  • Capitalize on your employer match. Make the most of your workplace retirement plan by ensuring you contribute enough to receive the full match if your employer offers it. Missing out on this opportunity means leaving free money on the table.
  • Save your raise. When you receive a pay raise, it can provide more flexibility in your budget. However, if you’re already managing your expenses comfortably on your current salary, consider directing the extra income from the raise into your retirement account rather than your bank account.
  • Get rid of unnecessary expenses. Explore possibilities such as negotiating a lower car insurance rate or bringing your lunch to work instead of buying it.

Bottom Line

A couple learning about the best rules of thumb for retirement savings

These retirement savings rules of thumb are a valuable starting point, but they should never replace a well-crafted financial plan that you actively monitor and update. While these guidelines have gained popularity for their broad applicability, the key to success lies in personalization. Consider them as a solid foundation, but always tailor your approach to your individual financial situation and goals. By combining sound financial principles with a customized strategy, you’ll pave the way for a secure and fulfilling retirement journey.

Retirement Savings Tips

  • A financial advisor can take away all of your worries about whether you’re investing the right way in order to reach your goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now!
  • Planning your ideal retirement destination? We’ve covered you with a breakdown of the most tax-friendly states for retirees. Each state’s calculator requires essential details like your Social Security income, retirement account income, year of birth, tax-filing status and the zip code of your potential retirement place.

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