Millennials (born between 1980 and 2000, aka Gen Y) drown in advice about investing for retirement and growing wealth to achieve financial goals. How much to scrape out of each paycheck to grow yourself a sufficient nest egg? Hard to pinpoint, but you can plan based on your goals and a few general rules.
First, investing now matters. Starting as soon as possible gives your money time to grow. Don’t put off investing because you think you can’t contribute enough to your accounts.
So you know the why and the when. What about how much? There’s no one-size-fits-all answer.
How much to save depends on your goals, what you’d like to accomplish in life and how you want your future to look. Think goals such as buying a home or traveling. Then estimate how much your goals will probably cost.
Break that big estimated number down into how much you need to save and invest each month to reach these goals.
What about longer-term investments and goals, such as retirement and financial independence? If you want to live a certain lifestyle in retirement, estimate 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 want to spend most of your time enjoying your home and going for walks around the neighborhood.
Envision your ideal retirement lifestyle, rough out your costs and expenses and create a mock yearly budget for yourself. Multiply that budget over a span of years (such as two to four decades) to get an idea of what you’ll need in your nest egg before you can retire. Work backward to determine how much to invest each month during your working career to meet that goal.
Start with these common rules — far from perfect measures of how much to invest now or what you need in your far-off retirement, they can get you in the ballpark.
—Eight times your estimated ending salary: Let’s say you predict to end your full-time working career making $90,000 a year. Your nest egg target: around $720,000 saved for retirement when you stop working.
Some factors influence this amount, including how long you expect to live or how much you plan to spend in retirement. If you expect to want a more lavish lifestyle in retirement than while working, you want to save more.
—Times 25: Figure your ideal annual total of expenses in retirement and multiply it by 25. Many people use the annual salary they expect to make by the end of their career.
—4 percent rule: This shows you how much you can withdraw annually in retirement. Let’s say you retire with $800,000 in your portfolio. The 4 percent rule says that, in order to stay solvent through your golden years, you can withdraw no more than 4 percent of that $800,000 ($32,000) a year.
—Invest in percentages: Because many of these numbers in investments and retirement revolve around your annual income, which may fluctuate a lot during your long career still to come, yearly percentages of that income make sensible investing benchmarks. In other words, don’t get caught up using fixed numbers year after year.
For instance, if you’re in your 20s, aim to save 10 percent to 20 percent of your income, whatever that annual number. Every time you receive a raise, increase that percentage. In your 30s, try to save and invest 20 percent to 30 percent of your yearly income.
Work to increase that number as you earn more or as you reduce expenses. Be patient and steady, and remember that you still enjoy the one thing you never earn more of: time.