We all know that we need to save for our golden years, but it can be difficult to know just how aggressive our savings goals need to be in order to fund a comfortable retirement. For many savers, it’s easier to simply put enough into the 401(k) to get the employer’s matching contribution and call it a day, but it is unlikely that this strategy will be adequate to sustain even an average retirement lifestyle.
The fact of the matter is that you will most likely need 10 and some say even as much as 25 times your annual expenses as a nest egg in order to enjoy financial security in retirement. But how do you get to that benchmark?
According to the research firm Hearts & Wallets, the best method for ensuring a comfortable retirement is burst savings. In a recent study, the research firm found that 64% of savers using this method were able to put together a nest egg at least 10x their salary. What’s most interesting about this study was that it found burst savers were likelier to reach this goal than non-savers, no matter what age they started their savings.
Here is what you need to know about burst savings and how to implement it in your life:
The 15% for 10 Years Rule
While the name “burst savings” may sound like you will be adding to your savings in fits and starts, that is a little misleading. The basis of the burst savings program is accumulating a large asset base over the course of 10 years. Your goal during that time is to save at least 15% of your income each year over a decade.
Clearly, a 15% savings goal is a lofty one for some workers. However, you can still take part in the burst savings plan even if saving 15% of your income each year is currently out of your reach. Save as much as you can afford the first year, and increase that savings by at least 1% each year. You will still be aggressively growing your asset base without feeling the pinch of 15% all at once.
Timing the Bursts
Once you have this savings plan in place, you’re ready to start taking advantage of changes in your income or expenses. For example, receiving a raise is the perfect time to ramp up your savings. You avoid lifestyle inflation by sending that extra money to your retirement accounts, and you won’t feel deprived since you are still living on the same amount you were bringing in before.
Similarly, you will have opportunities to send more money to your retirement whenever you lower your expenses. Examples include events such as becoming a empty-nester or downsizing to a smaller home are both good opportunities to increase your retirement savings.
And of course, windfall money should always be at least partially earmarked for your retirement accounts. Even if you only send half of any bonus, tax refund, inheritance, or other windfall to retirement, you will still feel the positive effects of a burst of savings on your nest egg.
Motivation and Follow Through
One of the best ways to ensure you have enough money for retirement is to set a target for yourself. You are much more likely to save for retirement if you have a concrete number in mind than if you allow it to be a vague goal.
Even if you are motivated to save aggressively, however, it is still easier to do if you take the decision out of your own hands. If your employer allows you to automatically raise your savings rate each year, take advantage of this opportunity to raise your contributions without having to think about it. Even if your employer is not yet that automated, make yourself a yearly appointment with your HR department to increase your rate — and put it in your online calendar so that you automatically receive a reminder email.
Making these decisions for yourself ahead of time will make it that much easier to follow through.
The Bottom Line
Burst saving is not an easy way to retire with a million dollars. However, it is a feasible strategy for any saver to ensure there is enough money to retire on—even if they are a little late to start saving.
- E*Trade IRA - Official Site