How Much to Save for Retirement

Saving for retirement planning is one of the largest financial commitments that you can make in life. For a comfortable retirement, you may need to amass hundreds of thousands of dollars over the course of several years. Before putting together a retirement plan, you should first outline your goals for retirement. With lifestyle goals in hand, you can calculate the amount of money that you should save each month toward retirement.

How Much to Save for Retirement: Financial Goals

Lifestyle goals provide a sense of direction for your financial plan. When describing your retirement lifestyle, you can calculate a lump sum of cash that will be needed to last throughout your golden years. In terms of future costs, you should remember to account for inflation. According to the U.S. Bureau of Labor Statistics' Consumer Price Index, the domestic inflation rate averages 3 percent per year. Because of inflation, you need to save up $2 million for a Naples, Florida retirement within the next 15 years.

How Much to Save for Retirement: Investment Projections

You will pull up an online financial calculator to make projections for your retirement savings. The financial calculator allows you to toggle through different figures for current savings, estimated rates of return, regular investments and future values of cash. After using the financial calculator, you can determine the monthly amount of money that you should be saving at a projected rate to return for your retirement goal.

How Much to Save for Retirement: Retirement Accounts

As a long-term investor, it is important for you to take advantage of tax-favored retirement accounts. All retirement accounts feature tax-deferral, where you will not owe taxes on interest income, dividend payments and capital gains on investments owned within the account. In exchange for this tax-deferral, you generally cannot take withdrawals from your retirement accounts until age 59 ½. 401(k), Traditional IRA and Roth IRA plans are examples of retirement accounts. 401(k) and Traditional IRA plans allow for tax-deductible contributions, but your withdrawals will be taxed as ordinary income. Alternatively, Roth IRA contributions are made with after-tax money, so your withdrawals are tax-free. For the 2010 tax year, you can make $5,000 worth of contributions into Traditional and Roth IRAs, combined. You should, however, make it a priority to take advantage of the 401(k) match at work. As part of your benefits package, your employer will match your contributions on a dollar-for-dollar basis up to a certain point.

How Much to Save for Retirement: Risks Versus Rewards

When selecting investments for retirement, you must weigh potential risks versus rewards. In exchange for safety of principal, you must be willing to accept relatively minimal investment returns. Alternatively, aggressive investments may generate high returns in several years time, but can be especially volatile in the short-term. For example, the S&P 500 Index has averaged an 11 percent return since its 1957 inception as a benchmark for U.S. stocks. This 11 percent average, however, includes 38 percent gains in 1995 alongside 37 percent losses in 2008. To manage risks and invest for growth, you can put together a diversified portfolio of both stocks and bonds. You should buy more bonds as you age and near retirement.

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