The information in this article is up to date through tax year 2019 (taxes filed in 2020).
The amount you need to save for retirement and how quickly you need to do so depends on several factors:
- how old you are when you start saving,
- your age at retirement,
- the rate of return on your investments, and
- how much you earn while working
The later you retire, the fewer years you’ll need to support yourself on savings. And the earlier you start saving, the less you’ll have to set aside from each paycheck to reach your goal when the time comes. So, how much will you need to save before you can stop working for good?
How much do you need to retire?
The size of your nest egg ultimately will depend on the lifestyle you wish to maintain when you stop working. If you plan to retire at 65 and you live for 30 more years, you’ll need enough money set aside to cover your needs and wants. You might already have a budget based on your basic needs. But certain expenses – like unexpected healthcare costs – are more difficult to predict.
Calculate your goal
You can use an online calculator to estimate the amount that you should set aside before you stop working. Or you can think about how much you’ll need in terms of multiples of your income. At age 35, for example, you may need to have 1-4 times your annual income already saved. When you are 50, you might need to have 5-10 times saved what you are earning at that time.
Speak with a financial advisor to determine what your unique retirement saving strategy should be.
Two ways to find retirement savings in income taxes
1. Adjust your withholdings
If you had more money in your paycheck each pay period, would you put more into your retirement savings? If your answer is yes, it might be time to adjust your income tax withholdings. Many people view their tax refund like a forced savings plan. They select fewer income tax withholdings than they are allowed on their W-4. Then, the IRS gets to hold on to their money until tax season, when it is returned in the form of a refund.
But if you only withhold the amount you owe for taxes, you could take the “extra” income you’d be getting back, invest in a tax-deferred retirement account, and even earn interest. It is recommended that you update your Form W-4 anytime your income, employment, or family status changes. Major life events could impact how much you need to pay in income tax, and it’s easy to lose track of your withholdings.
Read more about the 5 Reasons You Should Check Your Withholdings
2. Turn your refund into extra savings
If you do prefer to wait for your refund at tax time, this is still an excellent opportunity to make an investment in a retirement savings plan. Rolling just a portion of your money into a tax-deferred savings account is a great way to make the most of what you get back from the IRS. You still travel, pay down bills, or treat yourself with the remainder of your refund.