You know the importance of investing for your retirement and growing your wealth so you can achieve your biggest financial goals. But how much should you contribute to make sure you have enough in your nest egg when you need it?
The exact number is difficult to pinpoint – but there are some ways to plan based on your goals, and a few general rules of thumb you can use to ballpark how much you need to invest.
Why Investing (Now!) Matters
Remember the power of compound interest. Compounding means that by starting as soon as possible and giving your money time to grow, you’re giving yourself a better financial position than someone who delayed their efforts to save and invest.
Don’t put off investing because you think you can’t contribute enough to your accounts. Every little bit truly helps – but what does that mean in terms of the exact amount you should invest each month?
Think About Your Unique Goals and Needs
Ultimately, there’s not a one-size-fits-all answer to the question of how much you should save. How much you should save depends on your goals, what you’d like to accomplish in life, and how you want your future to look.
Start by asking yourself what type of short-term investments interest you. Think things like buying a home or traveling abroad. Then consider how much those things will cost. Once you have an estimate, you can break that big number down into how much you need to save and invest each month to reach these short-term goals.
After you’ve thought about things in the short-term, consider your long-term investments and goals like retirement and financial independence. If you want to live a certain lifestyle in retirement, consider how much that lifestyle will cost you per year.
If you want to spend most of your time traveling, a year in retirement will cost you more than if you wanted to spend most of your time enjoying your home, having family and friends over, and going for walks around the neighborhood or volunteering for your favorite cause. Neither one of these situations is “better” than the other, but financially speaking they look really different.
Envision your ideal lifestyle after work (and when you’ll need to start drawing from your investments). Then take some educated guesses on your costs and expenses and create a mock yearly budget for yourself.
Multiplying that budget over a period of years (like 25, 30, or 40) will give you an idea of the total amount you’ll need in your nest egg before you can retire – and you can work backward from there to determine how much you need to invest each month during your working career to meet that goal.
Rules of Thumb to Help You Determine How Much You Should Invest
While there’s no one right answer, trying to figure things out in your unique situation down to the last cent can be scary, overwhelming, and way too complicated.
Instead, give yourself a starting point by using these common rules of thumb. These aren’t perfect measures of how much you’ll need to invest and how much you’ll need in retirement, but they can help get you in a realistic ballpark.
8 Times Your Ending Salary: A good rule of thumb is multiplying your ending salary by 8. Let’s say you end your full-time working career making $90,000 a year. In this rule of thumb, you should have around $720,000 saved for retirement.
Some factors can influence this amount, including how long you expect to live or how much you plan to spend in retirement. If you’d like to live a more lavish lifestyle in retirement than you did while working, you’ll want to save more.
The Multiply-By-25 Rule: This one’s extremely simple. Take your anticipated annual expenses and multiply that number by 25. Many people take their ending salary to use as a guide. For example, say your ending salary is $100,000. Your nest egg should be $2.5 million before retirement.
The 4% Rule: The 4% Rule helps show you how much you can withdraw annually in retirement. Let’s say you retire with $800,000 in your portfolio. The 4% rule says that, in order to stay solvent throughout your retirement years, you should withdraw no more than 4% of that $800,000 – or $32,000 a year. Every year thereafter, you will continue to withdraw $32,000 adjusted for inflation.
Invest in Percentages: Because many of these numbers in investments and retirement revolve around the income you make, it makes sense to look at percentages of that income and decide how much you should invest from that. In other words, don’t get caught up on hard numbers.
If you’re in your twenties, aim to save 10% to 20% of your income – whatever that number happens to be. Every time you receive a raise, increase that percentage. When you’re in your thirties, make it your goal to invest 20% to 30% of your income. Work to increase that number as you earn more money (or as you reduce your expenses).