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Question:


What percentage of my budget should I be putting aside for retirement as a rule of thumb?
-GeorgeB


Answer:


That’s hard to say without knowing more about your personal circumstances. There are just too many variables – your age, the level and stability of your income, the amount and type of expenses you have. One thing that is probably true for you and almost everyone else, and it’s somewhat counterintuitive, is that you should save more for retirement as a percentage of your income when you’re younger and then ease up as you get closer to the event itself.
 
There are two reasons for this related to simple arithmetic. As you get older, if all goes right, you earn a lot more, and you also spend more on things like housing, health care, kids’ education and the comforts of life such as travel. That means the percentage that you can set aside for pension contributions – although possibly not the absolute amount – is likely to grow smaller.
 
More important, although you earn less early in your career, your savings can earn more due to the effect of compounding investment returns. A dollar that’s put to work when you’re young is likely to produce a lot more income for retirement than a dollar saved more recently because that first dollar spends longer accruing interest, dividends and capital gains – and then gains upon those gains. Also, you can tolerate more risk when you’re younger because you have more time to recoup losses. That means you can invest in assets like stocks that can trade with big swings but generate higher long-term returns.
-Conrad de Aenlle



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