You’ve probably heard that you should save 10-15% of your pre-tax income for retirement. If that rule of thumb seems to broad, well, it’s because it is. Should the percentage change as you get older? What if you have high medical costs? And how can 10% possibly be enough with health care costs skyrocketing and Social Security no guarantee? Here, we’ll answer the age-old question: How much of my paycheck do I save?
One nerd wrote in to ask,
I heard that you should save 10% of your income, but does that mean before- or after-tax income?
Okay, first off: 10% is way too low. Most financial advisors recommend saving 10-15% of your post-tax income, but that’s only a reasonable amount if you plan working until your 85th birthday. I recommend saving at least 20% post-tax, which is typically somewhere between 12% and 16% pre-tax. If that measly 2% doesn’t seem like much, consider this: a 22-year-old who invests an extra $1,000 now and gets a 6% return will have over $10,000 extra when she retires.
If you’re rapidly approaching retirement and don’t have sufficient savings, then the answer is simply to save as much as you can.
If you’re under 50
You should save for retirement no matter how old you are. I don’t care if your standard dinner is ramen and you still don’t know how to do your own laundry. You can’t rely on Social Security or pensions to support you in your golden years; it’s on you.
You can contribute up to $23,000 to tax-advantaged retirement accounts if you’re under 50: $17,500 to your 401(k) and $5,500 to your IRA.
If you’re over 50
As you approach retirement, you’ll start getting a better idea of how much you’ll have to pay. Add up your annual expenses and use a retirement calculator (CNN Money has a decent one) to estimate the minimum you’ll need to save every month. If you are unable to save that amount right now, start cutting expenses or look for ways to increase your income part-time.
After age 50, your IRA and 401(k) contribution limits rise to a total of $29,500 – $23,000 to your 401(k) and $6,500 to your IRA – so you can contribute a lot more while still maintaining your tax benefit.
Keep it in perspective
Again, health care costs are skyrocketing and Social Security is no guarantee. You should be saving as much as you can, without making unreasonable sacrifices. You don’t necessarily need to eat gruel every night just to save an extra $25 a month for retirement, but if you don’t have enough saved up, you should try to cut down on big-ticket expenses.
Where should I put my money?
You should invest your retirement money in this order:
- Pay off your debts. You know where you can get a 15% guaranteed return on your investment? Paying off your credit card debt.
- Contribute to your 401(k) up to your employer match. It’s free money!
- Max out your IRA contribution (be wary of income limits, however)
- Max out your 401(k) contribution
- Put the remainder in a regular investment or savings account
Get answers to all your money questions with the NerdWallet Newsletter, or simply email me to receive a personalized, expert answer.