8 Rules of Thumb for Saving for Retirement

By: Chris Joseph

Starting early can boost your retirement savings program.

ready for retirement image by Pix by Marti from Fotolia.com

Saving enough money for a comfortable retirement isn't easy, especially when you have a family to raise along with expenses such as a mortgage and car payments. Beyond the many financial sacrifices, coming up with a suitable plan to reach your retirement goals can pose a challenge. Following a few basic saving concepts can greatly simplify the process.

Save 10 Percent

Set aside 10 percent of each paycheck for retirement savings. This gives you a systematic savings method that is easy to follow and ensures savings consistency. Take advantage of any automatic payroll deduction options offered by your employer to further simply the process.

Bonds Equal Age

Structure your investment portfolio so that the percentage devoted to bonds equals your age. Bonds are a relatively safe investment, and risk avoidance becomes more important as you get closer to retirement so that you can preserve your nest egg.

Consider Domestic Stocks

Consider selecting domestic stocks for the stock portion of your portfolio. According to Bankrate.com, domestic stocks have averaged a 10 percent rate of return since 1926. Keeping this in mind can make it less likely that you will unload your stocks when the market inevitably dips.

Withdraw 4 Percent

Don't withdraw more than 4 percent of your savings per year after retirement. This increases the likelihood that you will not outlive your retirement funds. Consider decreasing the amount if your portfolio incurs a major loss.

Six-Month Emergency Fund

Set aside enough money to cover six months of household expenses. This protects you against a sudden job loss or unexpected medical expense not covered by insurance. It also reduces the need to raid your retirement funds or suspend your savings plan to meet these types of expenses.

Avoid Credit Cards

Compiling a large amount of credit card debt reduces the amount of money you can devote to your retirement plan. If you have outstanding balances on several cards, focus on paying off the ones with the highest interest rate first.

Never Too Early

The sooner you start saving for retirement, the better the financial shape you'll be in when the time finally comes. In additional to devoting more money toward a comfortable retirement, starting early also allows you more time to benefit from compounding interest.

Maximize 401(k) Contribution

If you have a 401(k) plan at work, consider investing the maximum allowable amount, even if it exceeds 10 percent of your gross income. In addition to ensuring you receive the full amount of your company's matching contribution, you will gain the additional benefit of lowering your taxable income for the year.

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About the Author

Chris Joseph writes for websites and online publications, covering business and technology. He holds a Bachelor of Science in marketing from York College of Pennsylvania.

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