Many people look forward to retirement, when you can relax, travel or take up a hobby you couldn't do when you were busy working and tending to other responsibilities.
But it can take years of planning and saving to make sure you can have a comfortable and secure post-retirement lifestyle. It's never too early to start putting away money, even a little. You'll thank yourself later.
If it seems overwhelming, don't worry. The best way to start is to ask yourself some basic questions about your retirement goals and timing. We'll get you started.
Determining how much you'll need to retire
There are a few good estimates of how much you may need, such as assuming that you'll need about 80% of your current pre-retirement income in retirement, said Shweta Lawande, lead adviser at Francis Financial in New York City, which offers financial planning, wealth management and other services. Pre-retirement is considered the period of time when you decide you want to retire and pick your retirement date.
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Things that will determine what you need to retire
Since the amount of retirement savings you'll need depends on the individual, having an understanding of your current personal finances in relation to what you want to accomplish during retirement is important, Lawande said.
Additionally, you need to consider finances you'll need to support loved ones and family, as well as for medical expenses.
Especially when it comes to medical expenses, life can be unpredictable, so it is key to consider the costs of procedures or medications, even if you are in good health.
If you plan to travel, entertain or pursue an expensive hobby, you may want to add extra savings for "more flexible, discretionary expenses," according to Merrill.
One guideline to keep in mind for retirement is the 4% rule, which says a retiree should be able to comfortably withdraw 4% from their financial portfolio each year for 30 years, adjusting for inflation over time.
Using this rule, people can decide if their investments are reasonable for them and can support them in any given year in retirement, Lawande said.
When should I start to save for retirement?
To best save for retirement, you should start as soon as possible. If you have a full-time job, start thinking about putting some money away.
Lawande said if you're earning an income, put aside 10% for retirement, and work your way up from there. On average, Fidelity estimates you should aim to save about 15% of your pre-tax income each year, which includes any employer match and assumes you're saving while you're between 25 and 67 years old.