There are differing opinions on the percentage of pre-retirement income an individual will need to finance his or her retirement years. Ultimately, your needs will depend on your planned retirement lifestyle and the amount that would be required to finance such a lifestyle. However, a reasonable estimate can be made so as to design and implement a suitable retirement program.
While it is important to add as much as you can to your retirement nest egg, care must be taken to ensure that you do not add more than you can afford, as doing so can negatively impact your financial profile and the amounts that you can afford to add in future years. To determine how much you can add to your retirement savings accounts, prepare a budget to show how much you have available to save.
When creating your budget, be sure to include details about all sources of income and all expenses, as well as your long-term and short-term financial goals. This will help you to determine how much to allocate to your long-term and short-term savings. If necessary, consider cutting back on non-essential expense items to increase the amount available for funding your retirement accounts.
Outstanding debts should not be ignored as the repayments are part of your expenses. If your amount of outstanding debt is high, you may need to implement a debt management strategy to help you pay off your debt quickly.
The Negative Impact of Saving Too Much
Saving more than you can afford may result in a shortage of funds to cover your ordinary expenses. This shortage may result in you being forced to make unwise financial decisions, such as withdrawing amounts from IRAs or using credit cards to cover expenses that should be covered with your income. Withdrawals from your IRA would be treated as ordinary income on your tax return for the year and may be subject to a 10% early distribution penalty. Amounts charged to your credit would accrue interest, which can add up to a significant cost if the balance continuously increases. If this becomes an unmanageable debt, it could force you to allocate amounts towards paying down the debt instead of adding those amounts to your retirement savings.
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