It happens so often, you may not even notice it anymore—that flutter of anxiety you feel in the pit of your stomach whenever someone mentions retirement. You’ve grown numb to the sensation because you can’t watch television, go online or even check your email without hearing or reading about how unprepared Americans are for life after work.
But when you do take the time to think about your future, you have only questions—no answers—about how much you need to save or how much you should have saved by now for any hope of a secure retirement. Because of the thousands of reports out there that claim you’re not taking the proper steps to retire comfortably, precious few offer any advice to help you make better choices.
The Formula for a Successful Retirement
Recently, however, the Employee Benefits Research Institute did attempt to predict a person’s chances of making it through retirement without running out of money based on their age, their income and how much they’re saving for retirement. Here are some of their findings:
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A 25-year-old male who makes $40,000 and invests 15% of his income has a better than 90% chance of making it through retirement with money in the bank. Unfortunately, those of us who are saving for retirement are only saving about 7% of our income—less than half of what we need to save to avoid running out of money. At that rate, our 25-year-old investor will have a little better than 75% chance of supporting himself through retirement.
So, this study confirms the age-old investing wisdom: The sooner you begin investing and the more you invest, the higher your chances of having a successful retirement—a retirement where you don’t run out of money.
Do You Fit the Formula?
But what if it’s too late to start early? You’ve been saving for retirement, but not as much as you should be. What are your chances of making it through retirement with money to spare? It depends on how much you’ve been able to save.
A 40-year-old making $40,000 will have a 90% chance of having adequate retirement income if:
- He already has $85,665 set aside for retirement, and
- He increases his retirement savings rate to 15%.
If he has no savings, it’s still possible to build enough of a nest egg to get through retirement. But according to the study, that investor would need to set aside more than 25% of his income to do it. That’s tough, but doable—especially if he’s out of debt.
Simple Strategies to Improve Your Chance of Success
At this point, you might be thinking, That’s a great example. But what about me? How can I be sure I won’t run out of money when I retire? Here are some simple strategies to make sure you’re doing all you can to reach that goal:
1. Invest 15%. There’s no way to overstate the importance of investing 15% of your income for retirement. Our example 25-year-old investor will increase his chances of retirement success by 7% by increasing his savings rate from 10% to 15%. At age 40, the same change will boost his success by more than 10%.
2. Don’t count on Social Security. This study included Social Security income in its projections, but we think you should forget about Social Security while you’re saving for retirement. If it’s there for you when you retire, great. If not, your plan should give you the savings you need to support yourself in retirement without the government’s help.
3. Speaking of the government . . . You’ll increase your chances of retirement success if you can protect at least part of your retirement savings from taxes. A Roth IRA can provide tax-free income in retirement where income from a traditional 401(k) is taxable. Explore your options to see if a Roth IRA would be a smart addition to your retirement savings plan.
4. Partner with an investing advisor. Retirement worries don’t have to keep you up at night. The right investing advisor can help you make sure you’re on track to have the savings you’ll need to avoid running out of money when you retire. They’ll help you pick the right investments, make sure you’re investing enough to achieve your goals, and answer all your questions so you can feel confident in your plan.
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This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.