Why You Should Start Saving for Retirement Today

Why You Should Start Saving for Retirement Today

October 26, 2020

Tagged As: Wealth Management, Personal

Why save for retirement?

For decades, those who retired from the workforce had access to retirement income sources such as company pensions and Social Security. Today, pensions have become a rarity within corporate environments, and Social Security is not guaranteed. The average Iowa Social Security benefit is $1533.06 per month.1  That equates to about $18,400 per year, which is roughly $3,000 more than an annual full-time income based upon the State of Iowa’s minimum wage.2 

As traditional pensions have been replaced by 401(k) plans, the responsibility to save has been transferred to you as an employee. Starting early is essential. Let’s look at an example:

Three people—represented by the blue, red and green lines—each invested $50 a month with an 8% return compounded annually until they were age 65. The only difference between the three is when they started saving. As you can see, someone who starts at age 20 versus age 30 has double the amount of money at retirement. Yet the 20 year old only saved an extra $6,000 compared to the 30 year old. The significant difference in their ending balances is due to the magic of compounding.

$50 Monthly Investment

50 monthly investment graph

Assumes 8% growth compounded annually at the end of the year. 

Actual returns and growth are subject to market fluctuations and future investment performance is not guaranteed.

 

How to get started?

Envision your future.  The key to successful retirement planning is to implement a plan and to review it often.  What should your plan look like?  How do you formulate a plan?  First, realistically envision the lifestyle you want when you retire.  Are you planning to travel, relocate geographically, downsize your home, or continue to work part time?

Evaluate your present situation.  It is important to review your present financial situation to determine the steps to get you where you want to be.  Among other things, this involves calculating your current net worth, organizing your expenses, and examining your existing retirement and other investments.

Determine your financial needs.  Generally speaking, financial experts estimate that you’ll need at least 75-85% of your pre-retirement income to maintain your lifestyle throughout retirement. But that number depends on different factors, such as:

  • Lifestyle changes in retirement
  • Retirement age
  • Estimated rate of return on your investments
  • Inflation
  • Taxes

How much will you need to save?

To achieve your retirement goal, you may need to accumulate savings and investments of 10-12 times your pre-retirement annual income.  Are you on track?

how much do you need to save graphic

Y-Axis: (X) times your salary

The above graph is an “X-times salary” guide that illustrates how many times your salary you should have saved for retirement at a given age.  For example, at age 45, one should aim for having 4 times their salary saved for retirement.  In order to stay on the path to retirement, you should be saving at least 10-15% of your gross annual income. 

To make sure you are on track for retirement, contact Hills Bank’s wealth management professionals to develop a personalized plan for your retirement needs – and to start saving today.

Investment products are not a deposit, not FDIC insured, not insured by any government agency, carry no bank guarantee, and may go down in value.