Published October 05, 2011
What's a good target for retirement planning? Most people would say $1 million, but they are off the mark by a wide margin. Given the eroding effect of inflation, you should be trying for a minimum of $2.5 million.
The most important factor in retirement planning is time. If you do not plan to retire for 30 years or more, you have plenty of time to build your retirement savings; your money at 7% will approximately double every 10 years. As you put more in, the pot grows and the doubling effect grows with it. Put aside $27,000 a year at that rate and you'll clear $2.5 million with room to spare.
Take advantage of the 401(k) offered by your employer. You will get a tax break now, as well as save better for your eventual retirement. For example, without a 401(k), a married worker earning $75,000 in the 25% tax bracket might save 12% of his or her income. That would require putting aside $346 from a bi-weekly paycheck. But by saving inside a 401(k), the tax savings result means that only $260 will come out of that same person's check. Both meet the same target, but with the 401(k), it costs less.
"Regardless of what your goal is, there are some general rules. Always participate in your employer's 401(k). Contribute as much as you can," Susan Jacobson, Ph.D., associate professor in the division of business from Regis University, advises. "Pick index funds with low fees. Index funds are passively managed to replicate an index like the S&P 500."
Most employers incentivize retirement planning by matching a certain amount of your contribution, and that is free money. The figures can vary (and employers could lower, raise or halt payments), but a typical plan contributes 50 cents for each dollar up to a certain percent of a salary. If you make $75,000 and the limit is 6%, $2,250 would be earned in effortless savings to you. Additionally, that money then grows by compounding.
Jacobson adds, "Inflation is very difficult if not impossible to predict. But people should be aware that if you think $X is enough to live on this year, it will most likely be higher in years to come. Again, the best advice is to save early and often."