Your ideal retirement may involve a lot of travel, the purchase of a few big-ticket items, and decades of worry-free, work-free days. But it'll take a large nest egg to get there.
If you want to to retire wealthy enough to achieve your goals, you have to begin planning immediately. Start with these three steps.
1. Start saving as early as possible
When you put money into a retirement account, you're investing it in stocks, bonds, and other assets that typically increase in value faster than money left in a traditional savings account. The sooner you begin saving for retirement, the longer the money will have to grow in the account before you need to begin drawing upon it. This extra time to grow can have a huge impact on the value of your savings.
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Consider two people who both make $50,000 per year and intend to retire at 65. They each put away 10% of their income for retirement, but one begins saving at 25 and one begins at 35. The person who started saving at 25 would have about $999,000 by the time they reached 65, assuming a 7% annual rate of return. The person who started saving at 35 would only have about $473,000 with the same rate of return. That's a difference of $526,000.
Set up a retirement account if you haven't already and begin making contributions, even if you can only spare a few dollars per month. You can contribute up to $19,000 to a 401(k) in 2019 or $25,000 if you're 50 or older, and $6,000 to an IRA or $7,000 if you're 50 or older.
2. Determine how much money you'll need for your retirement goals
You need an estimate for how much you'll spend in retirement in order to be sure you're saving enough. Start by determining the approximate length of your retirement. Estimate how long you think you'll live and be optimistic. It's not unreasonable to think you'll live past 90 or even 95 if you're reasonably healthy. Subtract from this the age at which you plan to retire to figure out how many years of living expenses you'll need to cover.
Next, total up your retirement living expenses, including housing, food, insurance, healthcare, utilities, travel, and any big-ticket items you intend to buy. Leave out any expenses you have today that you don't plan to carry into retirement, like child care. Once you've estimated your monthly expenses, multiply this by 12 and then by the number of years of your retirement. Don't forget to add 3% annually for inflation.
Your retirement calculator should take care of this for you. It'll also ask you to estimate an investment rate of return. While you may see annual returns of 7% or more, it's best to use 5% to 6% to be conservative.