Dear Garden State Trust:
How much of my salary do I need to save for retirement?
The irreverent answer would be “all of it.” All kidding aside, there is no simple answer for everyone. The answer depends upon how many years until retirement, how much income will be required then, what other resources will be available.
However, the Employee Benefit Research Institute has suggested a rule of thumb that is a good starting point for those who are in their 20s, just beginning their careers. The recommendation is that 10% of pre-tax salary should be set aside each year toward retirement.
Let’s assume that you participate in a 401(k) plan that includes matching employer contributions. You should save at least enough to capture the entire match. If the employer matches 100% of the first 3% of salary deferral, you should at least defer at least 3% yourself. But to get to the recommended 10% deferral rate, you’d need to save 7% of your salary, coupled with the 3% from the employer.
If your employer will match 5%, you need only defer 5% to reach the goal. If there is no matching contribution, the entire 10% deferral falls on your shoulders.
This can be a hard nut to crack when there are student loans to be paid and housing expenses to be considered. But it is very important to put time on your side in saving for retirement. The longer you have money in the market, the more likely it is that you will be able to meet your retirement goals and become financially independent.
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