Our previous article, Building Your Emergency Fund While Saving for Retirement, covered the basic building blocks of saving throughout your life. If you’ve started an emergency savings account, you’re one step closer to financial security and independence. Now we’ll break down retirement savings benchmarks by age. Whatever your ideal retirement age is, you’ll need to achieve financial independence first. Here’s how to do it.
We Break Down Retirement Savings Benchmarks by Age
Now that you’ve started an emergency savings account, you’re one step closer to financial security and independence. Early retirement is a popular buzzword now, driven in part by blogs like Mr. Money Mustache that prescribe frugal spending habits in order to reach financial independence in one’s 30s or 40s. Regardless of your ideal retirement age, you’ll need to achieve financial independence first. Here’s how to do it.
What is Compound Interest?
You’ve probably heard the advice that the earlier you start saving for retirement, the better off you’ll be. This is due to compound interest, which means that the interest you earn on your original contribution will be added to your principal and reinvested. In other words, compound interest is the wind in the sails of your retirement account.
For example, if you have a 401(k) plan you can expect to earn about 5-7 percent interest on your principal each year. Let’s say there is $10,000 in your account. After a year, you earn $500 in interest. Now your balance is $10,500, so the following year you’ll get $525, bringing your account balance up to $11,025. As you can see, compound interest will continue to work in your favor even if you don’t contribute regularly to your retirement account.
How Much Should You Have Saved for Retirement By 30?
As with your emergency fund, when it comes to saving for retirement, all you can do is start where you are. Something is always better than nothing. Aim to save at least 1x your salary by your 30th birthday, but don’t give up if you don’t get there.
According to the Bureau of Labor Statistics (BLS), the average pre-tax income of people between 25-34 years old is $66,470. This is close to the overall average salary for Houston of $59,604. Therefore, you’d aim to stash away about $60,000 in your retirement account by age 30. If your employer offers a 401(k) match, you should set your own contribution to get the entire match. This is basically free money that will make your balance grow faster.
If you started your career in your 20s, you probably saw things take off a bit in your 30s with a promotion and a higher salary. Your goal now is to have 3x your income stashed away. So if you’ve climbed up the pay scale along with the BLS average to $92,576, You’d aim for about $270,000 in your retirement account.
How Much Should You Have Saved for Retirement By 40?
If you started your career in your 20s, you probably saw things take off a bit in your 30s with a promotion and a higher salary. Your goal now is to have 3x your income stashed away. So, if you’ve climbed up the pay scale along with the BLS average to $92,576, You’d aim for about $270,000 in your retirement account.
How Much Should You Have Saved for Retirement By 50?
If the previous age benchmarks made you break out in a cold sweat, take comfort in the fact that you can make “catch-up contributions” once you turn 50. According to the BLS income chart, most people hit their peak earnings between 45-54 years of age (after which the average income begins to decline). So, this is the time to put the pedal to the metal on your retirement account if you haven’t reached the recommended benchmark for age 50 of saving 6x your income.
What Are Catch-Up Contributions?
According to the IRS, the 2019 limit for a total 401(k) contribution is $19,000. People age 50 and over can contribute up to $6,000 more than the annual limit, for a potential total contribution of $25,000.
How much should you have saved for retirement beyond age 50?
Your ultimate retirement goal is to save 10x your salary. Once you’ve reached this benchmark and paid off all your debts such as a mortgage or student loan, you can consider yourself financially independent. Congratulations! You’re now ready to start withdrawing about 4 percent of your account balance each year to live off of.
This is also the time to re-think your asset allocation and risk level. You may want to move some of your retirement savings into a CDARS account, which gives you access to FDIC deposit insurance on up to $50 million. Central Bank’s knowledgeable bankers can discuss these options with you and make personalized recommendations based on your situation.
Now it’s time to take the first step toward saving for retirement or increasing your existing contribution. First, examine your options. If your employer offers a 401(k) match, make sure you are signed up and getting the full match. If you work for yourself or as an independent contractor or part-time employee without access to a company-sponsored retirement account, you can open your own Individual Retirement Account (IRA). Set up a recurring deposit aligned with your paycheck today!
Central Bank is Your Local Partner in Savings
Central Bank has been helping individuals and families save for retirement since 1956. We offer personalized banking solutions for all of your financial needs. Visit our Personal Savings page to learn more about our account offerings. You can also contact us via phone or visit one of our four locations in downtown and greater Houston.