Let’s say your annual income is $100,000. (Nice approximation.) That 15% of his is $15,000. This is the amount you want to put into your interest earning account each year ($1,250 per month). So, at a 4% interest rate, $15,000 invested this year will become $15,323 the next year and $31,259 the next year ($15,323 balance plus new $15,000 plus $936 in interest). Each year, you earn more interest as your 401(k) balance grows. In seven years, you’re earning more interest than the $15,000 you’re depositing from your paycheck each year. And 40 years later (if you worked from 22 to 62), you’ll end up with over $1.4 million.
(If you want to play with the compound interest calculator, click here.)
Taylor estimates that retirement savings (401(k) plus pension and other savings) account for about 45% of the cost of living in retirement.The rest will come from each month social security check.
One last thing: 15% goal include A matching donation your employer is happy to make, says Taylor. So if an employer is willing to pay his 5% of her 401(k) savings, you only need to contribute 10. If you contribute 3%, you only need to contribute 12. Make sure that what you contribute plus what they contribute equals 15.
Even if you can’t (or don’t want) to put 15% of your salary into retirement right now, you can start saving for retirement in meaningful ways.
Everyone’s financial situation is different. Therefore, rules of thumb like the 15% rule I just discussed may not apply to everyone. With student loan payments, bills, and other necessary expenses looming overhead, squeezing 15% out of your salary may not be realistic for you right now, but that’s okay.
Douglas Boneparth, a certified financial planner, said: Born Fid Wealthco-author millennial moneyfix, tells SELF, and looks at the myriad costs millennials face the moment they graduate from college. His advice: Before you commit 15% to retirement (or regret not doing so), take a holistic look at your finances.
Do you have student loans to pay off? If so, how aggressive are the interest rates on those loans? It’s possible that the 401(k) interest rate won’t exceed the interest rates on these loans. In other words, it may actually cost you more to fund your retirement now that you’re likely paying off your debts.
Another thing to consider: Do you have a rainy day fund? Boneparth recommends saving three to six months’ worth of money for emergencies. While you’re building up this cash reserve, you may not want to give up retirement entirely, but until you’ve accumulated three to six months’ worth of savings, split your savings between your 401(k) and your emergency fund. It may make sense to do so.