A long-time reader, Dave writes:
Here’s a question:
How much do you put away for retirement/old age as a percentage of what you earn?
And subquestions like:
What factors into your decision (e.g., your age, your expected return, etc.) and
What do you do if you have to raid it for something unexpected (e.g., car falls apart, unexpected medical expenses, etc) — do you double down and save more and try to refill what you would have/should have had? Or just keep going?
The short answer is: a good rule of thumb is to invest 10% of your pay for retirement.
Here’s the long answer on how much you should save for retirement.
Here’s an intro to the Independence Days and how they’ll apply to Dave.
Independence Day 1: Save 10%
Automatically invest 10% of your income. This is where Dave will get back on track by automatically investing each month.
Independence Day 2: Get out of debt
Before trying to double down on retirement savings make sure to knock out any medical debt, or car loans, by paying the minimums and push to pay $300 or more extra towards your highest interest debt.
If Dave has no debt, then YAY! He’ll jump to Independence Day 3.
Independence Day 3: 3- 12 Month Emergency Fund
Instead of having to raid retirement, start building an emergency fund for car accidents, job loss, ER visits, etc. Have 3-12 months of expense in a liquid savings account that is separate from retirement savings.
Sound impossible to save thousands of dollars?
Now that youre debt-free you can take what you were paying towards your debt and complete your emergency fund. Or if Dave’s already debt-free then push to save $300, $500, $1000 or more each month towards an emergency fund.
Independence Day 4: Life Purchases
Save for a home, car, or college tuition.
Now Dave’s retirement savings is rolling again, his debt is paid in full, he’s got money in the bank for a rainy day, and now the sky’s the limit. He can now save up and have a plan for the fun things in life like buying a car, pr home. Or now this is when he can increase retirement savings.
How much can you contribute for retirement savings?
In 2017, you can contribute up to $18,000 annually in your 401(k) plan, and additional “catch-up” of $6,000 for those 50 and older.
Plus, you can contribute $5,500 in a IRA, and an additional “catch-up” of $1,000.
There ya have it Dave.
In a nutshell, start investing 10% now, knock out any debt, build an emergency fund, and then you can go bananas on doubling down on retirement!