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How Much Should You Save?

How Much Should You Save?

Meet your retirement goals with these tips

Kim Lankford | Monster Contributing Writer

How to Afford to Save

The reality is that it isn’t always easy to set aside money for retirement when you’re nowhere near your peak income and just trying to pay your regular bills. The good news: You have plenty of help. The IRS and most employers kick in some money, so you can set aside a substantial amount of money without taking much of a hit in your paycheck.

For example, if your employer matches 50 cents on the dollar for up to 6 percent of your salary and you earn $40,000, you’d get the maximum match if you contribute $2,400 in a 401k. In that case, you’d get $1,200 from your employer, bringing your total contribution up to $3,600.

And that $2,400 doesn’t lower your paycheck dollar for dollar either, since you’re investing the money pretax. If you’re in the 25 percent bracket, investing $2,400 would only reduce your take-home pay by $1,800 for the year. So it actually would cost you just $150 per month to end up with a $3,600 contribution every year. Start at age 30, and you’d have about $670,000 by age 65.

If you can also afford to invest $200 per month in a Roth IRA, your total savings rate would rise to 15 percent of your $40,000 salary. Continue to invest that much for 35 years, and you could end up with more than $440,000 at age 65, totally tax-free under Roth rules. Add the two together, and you’d have more than $1.1 million for retirement.

Trick Yourself into Saving

Even with all these benefits, you may not initially be able to afford to save 15 percent of your salary. And you shouldn’t be setting aside that much until you cover your other bases first — keeping three to six months’ worth of living expenses in an emergency fund so you don’t have to raid your retirement account (and pay steep penalties) if unexpected expenses crop up. It’s also essential to pay off high-interest credit card debt first so you don’t waste money on monthly interest charges.

But once you’ve met these obligations, the best way to maximize your money is to get it into savings before you can spend it. With a 401k, the money is subtracted from your paycheck before you see it.

You can also make automatic investments into a Roth IRA. Even just $100 per month can add up to $1,200 a year. And if you’re 30 now, keep saving at that pace for the next 35 years and your investments earn 8 percent annually, you’ll have about $220,000 tax-free by the time you’re 65.

While you’ll still need to increase your savings rate when you can afford to, these examples demonstrate it’s never too early to start. And it’s easy to increase your savings rate whenever you get a raise, bonus, tax refund, gift or any other form of extra money. When you’re used to living on less, it’s easy to invest the extra cash before you can spend it.

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