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How Much Should I Save for Retirement?

The first answer is: Save whatever you can.

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How much should you save for retirement? As much as you can, and then a little more and a then even more. As you get closer to retirement age, you can really assess how close you are to your goals. For everyone else, look at the following steps as a guideline for how much you should be saving.

1. Save Whatever You Can

You don't need a large sum of money to start saving for retirement. Small amounts add up over time, so if you can spare $20-$30 a week, it's a good start.

One of the best ways to get your money to grow is to invest through tax-deferred accounts. Investment earnings are reinvested without tax penalties, allowing you to get more for your investment dollar. The earlier you begin to save this way, the longer your money has to grow—and even 10 years can make the difference between a cozy early retirement and an extended work life.

If your employer offers a 401(k) or 403(b) plan, sign up now and contribute a small amount every month. When estimating how much you can afford to contribute, consider that your contribution is pre-tax, so it is not a dollar for dollar paycheck reduction. You are lowering your taxable income, which may even increase your after-tax earnings. Start by contributing 2 percent to 4 percent, assess the impact to your paycheck, and adjust as you feel comfortable.

If you do not have a tax-deferred account through your employer, you can make similar contributions to an Individual Retirement Account (IRA) and deduct the contribution from your income taxes. Or you can look into a Roth IRA. Contributions are not tax deductible, but once the money is in the Roth, it grows tax free and is never taxed again. Plus, you can withdraw contributions you make to a Roth before retirement without penalty.

2. Save at Least as Much as Your Employer Will Match

If you are contributing to an employer-sponsored retirement plan such as a 401(k) or 401(3)b, find out if your employer offers matching contributions and increase the amount you contribute to get the full benefit of the employer match.

A 401(k) match is a significant benefit—it's another way of saying “free money.” If your company is offering matching contributions on a plan that you aren't invested in, you are not taking full advantage of your benefits. Typically, companies will match up to 6 percent of an employee’s income. Most plans vest over time, which means that the company will start by giving you 25 percent of the match, and increase the percentage over the time that you are employed at the company. This means that after one or two years you may get 25 percent of your total vesting amount, after three years you get 50 percent, four years gets you 75 percent, and so on. When you are fully vested, you get 100 percent of your matching contributions. Some companies will match your contributions with company stock.

3. Save at Least 10 Percent of Your Gross Income

Once you are comfortable saving as much as your employer will match, the next goal is to save 10 percent of your pre-tax income. This is a good target goal for retirement savers, and if the money is withdrawn directly from your paycheck, you may not even notice the impact on your budget.

4. Save Raises and Bonuses

If you've made savings an easy and automatic process, you probably don't notice the money missing from your regular paycheck. Your next goal is to automatically stash away extra income that you don't need in the near term. Annual bonuses and salary increases can easily be funneled into your retirement savings plan. When you know your salary is about to increase, try saving it before it hits your bank account. You may be surprised how easy it is to live without the extra money.

5. Save More as You Near Retirement

If you have gotten a late start on your retirement plan, the government has provisions to help you catch up. Individuals age 50 or older, can add $5,500 more to their tax-deferred retirement accounts under something called the catch up contributions. Again, the earlier you take advantage of these contributions, the greater the impact they will have on your savings balance.

6. Save After-Tax Cash

You have taken advantage of every tax-favored option your employer offers, and you still have a bit of money left in your budget that can go toward savings. Stash it away in a Roth IRA. A Roth is kind of like other IRA accounts, in that you can contribute regular amounts to the account and invest in a wide variety of stocks, bonds and mutual funds. But instead of pre-tax money, contributions to a Roth are made after the money is taxed. Then money in the account grows tax free, and you are not taxed even when you withdraw the funds. Unlike a regular IRA, contributions you make to a Roth IRA can be withdrawn before retirement without a penalty. This make a Roth IRA is a great place to put away as much of today's dollars as you can.

If you've done all of the above, you are on the right track for retirement. Go ahead, use a retirement calculator to see how close you are to your goal.

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