Growing up, there was probably a time when you wanted something your parents weren’t willing to buy you, and you were told that the only way to get it was to save up and pay for it yourself. Finding the motivation to do so was fairly simple because you knew how much money you needed, the likely amount of time it would take you to save up that amount, and what your reward would be.
Sadly, saving for retirement is much less straightforward.
We are told to save but we don’t know how much (or the number keeps changing). We don’t know when—or even if—we will be rewarded. And we don’t know specifically what we will be rewarded with after all that savings.
With such a poorly defined goal, is it any wonder saving for retirement is such a challenge? Or that it’s so easy to use the amount we do end up saving for something else? I don’t think so.
Setting a Specific Retirement Goal is Key
My retirement goal is to save $1.6 million by December of 2030 which will replace ~60% of my annual expenses income (a small pension and social security will cover the difference) assuming I will live to age 90 and the annual rate of inflation is 2.5%. Are these assumptions correct? Maybe. Can I do it? I am pretty sure I can. But what I do know is that setting this goal was critical to me getting and staying on track.
By setting this goal, I was able to:
- Quantify monthly and yearly savings targets
- Determine what rate of return I should aim for
- Identify an ideal income.
Each of these is important for different reasons.
Monthly and yearly savings targets tell me what I need to contribute each month. If I fall behind in my contributions, I get immediate feedback that I can act on.
I can increase my contributions, adjust my retirement goal downward, or—and this gets to the second bullet—revisit my investment strategy to identify opportunities to increase my rate of return. By increasing my rate or return, I don’t have to contribute as much to still reach my goal.
Finally, there is the income side of the equation. If I am struggling month after month to meet my savings targets then maybe I need to increase my earnings. I can negotiate a raise, find a better-paying job, or take on a side hustle. The end result will be the same: more money I can save toward my retirement.
Calculating Your Goal
In saving for retirement, there are lots of ways to calculate your goal. I have all my accounts linked in Mint so I used the retirement calculator that is built into their system. This works well because it updates my progress in real time so I know, for example, that as of today, Mint projects I will reach my goal a little early, in August of 2029 or about 16 months before my ideal retirement date.
If this changes, will I worry? Not really—I can adjust for it by working longer or by paying off my mortgage early so I don’t need as much money as I am estimating for monthly expenses.
If you already have an account at Mint or with an investment company such as Fidelity, they likely have a calculator you can use.
Also, don’t let the extremely large number that will likely result, or the fact that you are guessing how long you will live or how much income you will need, stop you from setting a goal. Having a goal is the most important step. There will be plenty of time to play around with the variables later.
How to Save Money
Now that you have your monthly and yearly targets, the rate of return you are aiming for, and your ideal income, it is time to look at your expenses to see how you can carve out money to set aside toward that goal.
A good first step is to get used to living on only 90% (or less!) of your take home pay. If you have been living on 110% of what you bring home—a.k.a. spending more than you net—this may be a big adjustment but if you haven’t then you may be surprised how easy it is to adjust. What happens to the other 10%? You could use it to fund an emergency fund or a Roth IRA if you qualify.
The next step is to cut your expenses so you can find additional money you can put aside. Here are some of the ways I have cut expenses:
- Got rid of cable
- Switched to a lower-cost gym
- Negotiated cheaper internet
- Examined all my monthly subscription fees and stopped the ones I didn’t use (sorry Netflix and Hulu!)
- Paid all my bills on time and managed my bank account to avoid overdraft and late fees
- Found ways to save on groceries (I like to shop at Trader Joe’s and Aldi)
- Ate out less
- Switched from a pedicure every four weeks to every six weeks (or more).
(Check out my post on My Favorite Tips to Save Money for more ideas!)
Note that I didn’t give up pedicures altogether, and I wouldn’t ask you to give up the things you love altogether either. Lattes? If you love them, have one. But maybe limit yourself to two or three a week? The key us to be intentional with your spending.
What’s Your Retirement Savings Goal?
Have you already calculated your goal? The monthly expenses you need to plan for? The age at which you want to retire?
These aren’t rhetorical questions: the answers are knowable and identifying them is key to motivating yourself to save. Comment below with your goals!