Everyone will retire at some point, and when you do, you need a pension fund. But what is a good pension pot to have by retirement?
There isn’t a one-size-fits-all number since everyone has different expenses, lifestyles, and goals, but knowing how to figure out that number is important. Some people are chasing goals to retire early and others are chasing goals to retire well.
Here’s everything you must know.
What is your Pension Fund?
Your pension fund is all of your retirement funds collectively. If you have employer-sponsored retirement funds and individual retirement funds, the combination makes up your pension fund and is what you have to use when you retire.
All retirement accounts are tax-advantaged either upfront (when you contribute) or when you withdraw funds depending on if you have a traditional retirement account (tax breaks now) or Roth account (tax breaks when you retire).
How Much Does a Great Pension Fund Have?
Like we said earlier, no two people have the same financial needs for retirement. A great pension fund allows you to meet your financial goals during retirement. Ideally, you should be able to replace around 80% of your income before retirement each year. If you retire making $100,000 a year, you should be able to have $80,000 a year in retirement if you save right.
To determine a great pension fund for you, ask yourself these questions:
- What age do I plan to retire?
- Will I work at all during retirement?
- What expenses will I have in retirement? Namely, will I have a mortgage still?
- How will I get health insurance?
- What lifestyle will I lead?
- What are my goals during retirement?
Answering these questions will help lead you to the right pension fund. Set that goal, but then break it down to more manageable pieces. For example, you can say ‘I want to save $1 million for retirement,’ but then break it down into achievable goals regarding how much you’ll save each month or year.
What is a good pension pot to have by retirement?
Once you’ve figured out what is a good pension pot to have by retirement, your next step is to figure out how much you can afford to put in your pension fund.
You can say ‘I want to save $50,000 a year’ all you want, but if you can’t afford that amount, it won’t be reality.
Be realistic with yourself and look at your budget and don’t forget to include any employer match contributions.
At the very least, contribute as much to your 401K as your employer will match. For example, if your employer matches dollar-for-dollar up to 3% of your salary and you make $75,000, contribute at least $2,250 in that account to get the ‘free’ $2,250 contribution.
You can use a retirement calculator to determine how much you should save too. Most retirement calculators ask for your age, pre-tax income, and current savings. You can then play around with the deposit amounts to see how close you’ll be to reaching your necessary retirement goal (the minimum required to keep up the same lifestyle).
How can you Contribute to your Pension Fund?
You have many options to contribute to your pension fund and we recommend you take advantage of all of them.
Employer-Sponsored Retirement Account
Take advantage of your employer-sponsored retirement account especially if they offer an employer match. Even if they don’t, think of it as disciplined savings. Your contributions are automatically deducted from your paycheck so there’s no chance of spending the money before you have a chance to save it.
The downside is employer-sponsored accounts have fewer investment options. You’re restricted to what the sponsor offers and may not have as much flexibility in changing your portfolio as you would with an individual account.
Individual Retirement Accounts
Everyone can open IRAs. If your income exceeds $129,000 as a single-filer or $204,000 for married-filing jointly couples, you may not be able to open a Roth IRA, but everyone that works can open a traditional IRA.
The contribution limits are much lower – $6,000 per year for those under 50 and a $1,000 additional contribution limit for those over 50.
The beauty of IRAs is you are in charge. You open them with any broker you want and can invest in any assets. You have more flexibility, but don’t get the employer match.
Investing in both your 401K and IRAs is the best way to diversify your retirement funds and maximize the money you have available for retirement.
How to Level up your Contributions
No matter how lofty your retirement goal feels today, there are ways to make it happen. Here are a few of our tried-and-true tricks.
Automate your Savings
Don’t leave savings to chance. Set up automatic contributions either from your paycheck or from your checking account each month. This makes your contributions a sure thing. Consistent contributions are the key to growing your retirement savings.
Set a Goal
Don’t leave saving for retirement to chance. Set a goal and constantly revisit it. See how close you are to achieving your goal or how much you should rebalance your portfolio to increase your chances of saving enough money.
Cut Back on Spending
If you don’t have enough room in your budget to save as much as you hoped, revisit your budget and find ways to cut back. You’d be surprised at how many “little changes” can add up and help you reach your retirement goals.
Start Today
Too many people think ‘I’ll start tomorrow’ when saving for retirement or ‘I’m too young to worry about it.’ No matter how young you are or how little you have to save right now, do it. Every dollar you save today is worth more tomorrow and the earnings keep compounding. The more you wait, the less you’ll have.
Final Thoughts
What is a good pension pot to have by retirement? Your pension fund should have enough to cover your goals in retirement. At the very least, it should provide you with 80% of your annual income each year. That’s a big goal if you look at the big picture, which is why starting your pension fund today is the only way to achieve your goals!
Jon Kuperman is a software engineer and real estate investor. He’s always looking for new investments. He’s also hoping to achieve financial freedom through investing.