How Much to Save in a 401K? Fund Your Future on the Cost of Your Daily Coffee

Saving for retirement is one of those things that everyone knows they should do, like flossing and drinking a half gallon of water every day, but studies show many of us are spending more on life’s daily pleasures than investing in our retirement.

Choose Retirement Before Coffee

Why? Because investing in your 401K should be something you do without question and on a regular basis, just like your morning coffee fix. In fact, people ages 35-44 spend $1,410 a year on coffee. Investing your coffee budget could help you set yourself for future financial stability.

We’re not saying skip the coffee. Rather, consider that daily stop at your favorite café may seem like a small splurge, it adds up over time. If you were to put the same amount in a 401K, the compounding interest would turn the $1,410 a year into $118,440 over 30 years, using an average 6 annual percent return.

Make Investing in Your 401K a Regular Habit

Think of saving for retirement like a bi-weekly or monthly habit. According to Brad Sanders, the First Vice President at Rockland Trust’s RT Investment Services Group, the easiest way to make sure you are saving instead of splurging is to set up automatic deductions, so the money never hits your bank account in the first place.

“Automate savings through a 401K or savings account each month, it really helps,” said Brad. “If it goes directly to a retirement vehicle, then you’ll miss it a little less. If it never ends up in your wallet, you don’t even realize what you’re missing.”

Stretch Your Budget and Your Investments

Start by creating a budget and make sure you’re saving as much and as early as possible to reap the rewards of compounding interest or interest that is reinvested versus being paid out. Use online tools or mobile apps like Mint to determine how much you are spending every month and on what. Are you buying lunch every day rather than brown bagging it from home? You could save $50 or more each week by bringing your own ham and cheese sandwich. Paying for an expensive gym membership? Check with your health insurance company to see if it provides discounts.

If you have an employer-sponsored retirement plan, contribute at least the minimum for an employer match. If you get a raise, allocate the extra funds to your 401K. If you don’t have access to a 401K, open a Roth IRA and contribute after-tax dollars so you don’t have to pay taxes when you withdraw the funds, unlike a traditional IRA.

Determine how much you should be saving by using an online retirement calculator. According to Brad, online calculators can be very helpful as they force you to focus on your resources and your needs versus your wants. While you can always borrow money for a house or a car, you can’t borrow for retirement.

PRO TIP: Adjust your tax withholdings so that you break even on your taxes, versus being repaid by the government after filing. Brad said while people love to get a big refund check, having that money in your pocket, or better yet in an account earning interest, is better than letting Uncle Sam sit on your money for free.

Set Reasonable, Achievable Goals

It’s important to focus on a few, achievable goals and not overwhelm yourself trying to accomplish too many things at once. Generally, people aim to invest or save 15 to 20 percent of their income but that’s not always realistic, especially if you have existing debt. Brad suggests that once a large expense is paid off, increase your retirement contribution by a percent or two and continue to do that as you pay off more debt, receive pay increases or generate extra income. While it’s possible to catch up on your retirement savings, it’s better to get off to an accelerated start and into good habits the first 20 years of your career.

Our financial consultants are available at Rockland Trust’s RT Investment Services to help you find everyday ways to invest more in your future. Schedule a meeting with one of our Financial Consultants to discuss your financial goals!

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