Bundles of US one hundred dollar bills in bird © Don Farrall-Photodisc-Getty Images

Older folks who religiously put money away each month into their 401ks saw their accounts decimated only a few years ago when the markets crashed, and now need to catch up -- fast. Younger people who are just starting out, on the other hand, might not have a lot to put into a retirement savings account, but can benefit from time and compounding interest.

So, exactly how much should you save for retirement?

Financial experts estimate that you’ll need approximately 70 percent to 90 percent of your pre-retirement income per year, but it’s also important to set realistic goals and project your retirement expenses based on your needs and lifestyle.

You’ll also want to determine how much you must save to close the gap between what Social Security and other income will provide. Following are some tips to help get your retirement savings plan on track and calculate how much you need to save for retirement.

Consider your needs

When you’re making your retirement calculations, you’ll want to factor in that some expenses will likely increase during retirement, like health insurance premiums and prescription medicines. Remember that other costs such as work-related and home expenses, loans and some insurance premiums might decrease. Illness, temporary loss of income or caring for an elderly parent could derail your retirement savings plans. Include a cushion for the unexpected.

Review your projected Social Security benefits estimate

Each year, the Social Security Administration sends you a Personal Earnings and Benefit Estimate Statement showing projected benefits at age 62, your full retirement age and age 70. This can help you determine how much you may need to supplement Social Security benefits. You can also find the statement online at http://www.ssa.gov/retire.

According to the Social Security Administration, if you were born between 1943 and 1954, your full retirement age is 66. If you choose to take Social Security benefits earlier, here’s how monthly benefits are likely to be reduced, depending on the age you decide to retire:

  • 25 percent less per month at 62
  • 20 percent less per month at 63
  • 13.3 percent less per month at 64
  • 6.7 percent less per month at 65

Steps to take now in financial planning for retirement

Using the information above, you can calculate a rough number of how much you’ll want to have saved and find an affordable retirement age. Now, you need to start working toward saving up for retirement. Here’s what you can do now to start your retirement fund or to grow it faster.

  • Maximize your retirement plan contributions. If  you’re under age 50, you can contribute a maximum of $17,500 to your 401k plan in 2014, and $5,500 to your IRA. If you’re age 50 or older, you might have the chance to put away even more with the “catch up” contribution of up to $23,000 to your IRA or $6,500 to your IRA. Additionally, a Saver’s Credit can make you eligible for a tax credit worth up to $2,000 if you’re married filing jointly or $1,000 if you file individually.
  • Don’t invest too conservatively. When thinking about how much to save, to make the most of your retirement you want to carefully balance how to invest aggressively enough without jeopardizing your financial future. Getting professional help in choosing investments and financial planning for retirement can provide valuable assistance. Remember, a diversified portfolio is key.
  • Start spending less. If you don’t have one, now is the time to create a budget. For one month, track how you spend your money. This helps determine where to cut back and redirect your savings toward your retirement.

Reaching retirement age: How to stretch retirement savings

Once you’re retired, you can make your assets last several more years if you draw on money from taxable accounts first and let your tax-advantaged accounts compound for as long as possible.

At age 70 and a half, you’re required to begin taking minimum distributions from your retirement account. But even that money can grow if you don’t use all of it for living expenses. By investing a portion or all of your yearly distribution, you may continue to increase the life of your retirement nest egg. You might also need to supplement your retirement savings with part-time work.

By focusing on cutting expenses and diverting your funds to retirement savings now, you’re taking the most important steps to creating a solid financial future.

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