How much does it cost to retire? If you’re like most Americans, you don’t know the answer. But experts use a quick rule of thumb to gauge how much you can spend. They recommend a safe withdrawal amount of about 4% of your savings each year, which means that by the time you reach retirement age, you’ll need about 25 times your annual payout.
A 2021 Bankrate survey shows that more than half of Americans are behind in saving for retirement. Another 16% were unsure if they were on the right track.
It’s no surprise that about half of working families are at risk of losing their standard of living in retirement, according to the Boston College Center for Retirement Research’s National Retirement Risk Index (NRRI).
However, there are ways to make sure you stay on track. Here are tips on what you can do to boost your savings capacity and what you should do today, no matter your age or financial situation.
How much does it cost to retire?
When a client asked Dan Tobias, CEO and certified financial planner at Passport Wealth Management in Charlotte, North Carolina, how much they needed in retirement, he quickly diverted the question and asked what their retirement would be like .
“Do you want to drive a Lamborghini, or do you want to move into 55+ condos in Florida?” Tobias asked.
After Tobias understands the person’s vision for retirement, he can apply certain rules of thumb. Using the classic 4% rule, you can see what 4% or 5% of your retirement savings is and how your lifestyle will live off that amount. If you don’t hit that number, you’ll either have to increase your contributions or live more frugally in retirement.
To gauge whether you have enough savings, Fidelity Investments recommends a certain level of retirement savings as you age.
For example, by age 30, you should save at least your annual salary.
By the time you are 40, you should have tripled your salary.
At age 50, you should be saving 6 times your annual income for retirement.
By age 60, you should be saving 8 times your salary – by age 67, it should be 10 times your salary.
Some consultants have different estimates: Bank of America estimates that middle-income earners need to save 8.2 times their salary by the time they reach their early 60s to safely replace their income.
Bankrate’s retirement calculator can help you better understand how much money you need and whether you might need to work a few more years than expected. But most importantly, be realistic about your goals — don’t underestimate the slow costs of aging, especially health care costs.
Retirement Accounts: Roth IRA vs Traditional IRA vs 401(k)
Once you commit to saving for retirement, you can choose how and where to save. One of the most popular options is an individual retirement account, or IRA. There are two main types: traditional IRAs and Roth IRAs.
The biggest benefit of an IRA is that it saves you tax breaks, but it also offers other benefits, such as: B. Tax-free growth of your contributions. The exact type of benefit depends on the type of IRA. Here are the differences between the two main types of IRAs:
Traditional IRA
Income requirement: Income must be available. There is no maximum income, but the tax deduction may expire on a modified adjusted gross income of $68,000 in 2022, depending on your enrollment status and whether you’re on a work plan.
Contribution limit: $6,000 per year in 2022 or $7,000 per year for those 50 and older.
When can funds be withdrawn? Funds can be withdrawn at age 59 ½ or later.
Tax benefits: Traditional IRAs allow you to deduct your contributions from income tax if your income does not exceed your maximum income. Any funds in the account are tax deferred until withdrawn.
Early Withdrawal Rules: Withdrawals from a traditional IRA before age 59½ typically result in taxation and a possible 10% penalty.
Minimum Distribution Required: Yes, after age 72.
Roth IRA
Income requirement: Income must be available. The 2022 revised adjusted gross income must be less than $129,000 for individual applicants to contribute in full. Partial contributions are allowed above this amount but below $144,000 (2022). Exports for spousal filings start at $204,000 and go up to $214,000 (2022). However, workers can still open accounts through the Roth IRA backdoor.
Contribution limit: $6,000 per year in 2022 or $7,000 per year for those 50 and older.
When can funds be withdrawn? Deposits can be made at any time, and amounts (including income) can be withdrawn tax-free from age 59, provided the account has been in existence for at least five years.
Tax benefits: With a Roth IRA, you can invest after-tax funds and withdraw tax-free contributions and income in retirement. Any funds in the account can grow tax-free.
Early withdrawal rules: Donations can be withdrawn tax-free, but income is taxable and subject to a 10% penalty.
Minimum required assignment: No, you don’t need to worry about it.
These are some of the main differences between a traditional IRA and a Roth IRA, but plans also differ in other important ways. It’s important to know which plan is best for you.
Another popular retirement planning option is a 401(k) set up by your employer. A 401(k) may offer similar benefits to an IRA, but it also has some key differences.
401(k)
Another popular retirement planning option is a 401(k) set up by your employer. With a 401(k), you can automatically invest directly from your paycheck, so many people don’t realize the money is being transferred to their retirement accounts. Probably the biggest benefit of a 401(k) is employer matching. Many companies will match some or all of your 401(k) contributions in exchange for free money for your retirement savings.
Like the IRA, 401(k)s come in two forms: a traditional 401(k), which is funded with pre-tax funds, and a Roth 401(k), which is funded with after-tax funds.
A 401(k) may offer similar benefits to an IRA, but it also has some key differences.
Income requirements: There is no limit to your income, but you must have income and an employer offering the program.
Contribution cap: $20,500 in 2022, while workers 50 and older can contribute an additional $6,500 for a total of $27,000.
When can funds be withdrawn? Generally, withdrawals can be made without penalty after the age of 59. A Roth 401(k) also requires the account to be open for at least five years to avoid penalties.
Tax benefits: In a traditional 401(k), you contribute before taxes, which means you don’t pay tax on your contributions. Any funds in the account are tax-deferred until withdrawn and then taxed. A Roth 401(k) uses after-tax dollars, so there is no immediate tax benefit, but the money can be withdrawn tax-free at retirement age.
Early Withdrawal Rules: You can withdraw your money early, but there is usually a tax and a 10% bonus penalty on all winnings. In cases of urgent need, a hardship claim can be made. Alternatively, your plan may allow you to add credit to your account.
Minimum Distribution Required: Yes, usually starting at age 72.
A 401(k) is an attractive addition or alternative to an IRA plan, especially because of its much higher contribution amounts, no income restrictions on participation, and employer matching.
Where do I start when saving for retirement?
You can choose from a variety of tax deferral options – which one should you choose? Here’s how experts recommend you do it:
Get every 401(k) match: If your employer offers any type of matching funds when you fund your account, this employer-sponsored plan should be your first choice. Employer matching is the easiest and most reliable way to make money, and you should make the most of it. You should only consider investing in an IRA if you get this free money.
Maximize your IRA: Contact your IRA when you run out of 401(k) matches or when your employer doesn’t offer a 401(k) plan or match. Experts prefer all the benefits of a Roth IRA. Then maximize your 401(k): If you’ve maxed out your IRA and have more to save, you can go back to your 401(k) and add more maximum annual contributions.
Taxable account: If you have more savings, you can put the money into a taxable account, which may be a brokerage account or a bank account.
The order of your accounts will help you earn guaranteed employer-matched returns before moving to what may be the best retirement account available in a Roth IRA. Here’s how to get the best benefits of these accounts in the first place.
How to maximize your budget
Even with limited resources, there are ways to maximize your savings so you don’t get bogged down later. Here are some of the most useful methods:
Set up automatic posting. If you never see money pouring into your savings, you have no chance of missing it. Whether your employer offers direct deposit to multiple accounts, or you set up your own account to automatically transfer funds to dedicated savings, auto-contribution is an easy and straightforward way to get savings into your budget.
Reduce expense. Reduce, and you can then put those extra dollars into your savings account until you start meeting your goals.
Focus on big costs. Forget the occasional coffee: the best place to save money is where you spend the most: your home, car, dining out, travel, or anywhere you spend a lot of money.
Find a part-time job. If you don’t see an option to cut costs, you can look for a side hustle. Whether you choose freelancing, a side hustle, or passive income, a few extra hours each week can make for a healthy investment in your savings.
It’s important to factor savings into your budget now. Americans’ biggest financial regret is not saving for retirement early, according to a Bankrate poll. You want your money to work for you as quickly as possible – earn interest on your winnings.
How to save in your 20s
The irony of retirement planning is that you have to start young. To unleash the full power of compound interest, you need to maximize the years of savings you give yourself. By the time you’re 20, your retirement account should be making as much as you make in a year.
Build your emergency fund
Start small. Financial advisors recommend that you keep your most important expenses in a high-yield savings account for six months. This is quite a daunting task for someone just starting their career.
You don’t have to achieve all your goals at once. Aim for a month’s worth and go from there. If you need cash, an emergency fund will prevent you from getting into a retirement account, which hinders your ability to compound earnings. Use a secure savings account to make sure your money is there when you need it, and get the best interest rates by hanging around.
Saving for retirement
Use your employer’s 401(k) plan
Aim to put at least 10% of your salary (including any employer match) into a tax-advantaged retirement account, such as a 401(k). According to a November 2021 report from the U.S. Bureau of Labor Statistics, as of March 2021, about 68% of workers had access to a retirement plan through their employer, but only about 51% of those who had access had used it.
New hires may be automatically enrolled in a retirement plan, which is a good move, but you may be prepared to save a small percentage of your salary — say 3% — less than suggested.
Make sure you increase your contribution or at least set up an automatic upgrade so you can contribute more each year. Most importantly, make sure you get free match money from your employer. Here are some other smart steps to take in your 401(k) plan.
How to save without a 401(k)
Consider a Roth IRA if your employer doesn’t offer a 401(k) or you are a part-time employee. You can save $6,000 in after-tax income (through 2022), but the money is tax-free and tax-free when you withdraw it in retirement.
Alternatively, you can contribute pre-tax income to a traditional IRA—up to the same amount as a Roth IRA each year—and the funds won’t be taxed until you withdraw them.
To replicate the simplicity of a 401(k), you can set up direct deposit to automatically pay into the retirement fund of your choice. You can maximize your contributions for the year by transferring $500 of your monthly income into an IRA.
Start saving early
Let’s say you start saving $6,000 a year in your 401(k) at age 22 and put that amount away by age 67.
Compare that to someone who starts saving ten years later and is only 35 years away from retirement. That person would need to save nearly twice as much each year to get the same amount by age 67.
Bankrate’s 401(k) calculator shows whether you’re on track to meet your retirement savings goals.
Consider increasing allocation to stock
Participate actively by investing a high percentage of your portfolio in stocks. If you are in your 20s, you have a long investment horizon. This means you can handle the ups and downs of the stock market and potentially benefit from an all-time high return of about 10% per year for an extended period of time.
How to save money in your 30s
The goal is to double your salary in your retirement account by age 35, and triple your salary by age 40 if you fall behind.
Reserve your emergency fund
Your 30s is when you really start to grow financially. This is also when people usually buy a home. The median age of first-time home buyers in the U.S. in 2022 will be 33, according to the National Association of Realtors.
However, maturity means you have more to lose. Late mortgage payments and rent arrears are completely different situations. You don’t want to lose your home, which may be increasingly crowded with kids. Now is the time to increase the one to three-month emergency fund to nearly six months.
Build Your Retirement Savings
This is when you start making real money in your life, which makes saving for retirement even more important. If you’re falling behind on your 10% savings goal, do it now and don’t be afraid to increase it.
You can now also benefit from an automatic increase in retirement assets. You can pay directly to your superannuation fund, increasing by a fixed percentage each year. Since the increased percentage is automatically credited to your account, it is impossible to miss it.
You can also start saving more of your raises instead of spending them.
Be consistent with your spouse
Many Americans get married at this time in their lives. It means committing to someone romantically and financially. Both have a way of influencing each other.
According to a January 2022 survey by Bankrate’s sister site CreditCards.com, 32% of Americans in serious relationships hid a financial account, such as a credit card or savings account, from their partner, or spent more than their partner’s will.
11% of respondents said that financial infidelity is worse than physical infidelity. Successfully achieving your retirement goals depends on clear communication with your spouse on all financial matters: from your budget to how much you save to planning what you want to do in retirement.
How to save in your 40s
The goal is to save four times by age 45 and six times by age 50. As your income increases over the decade, your savings rate may also increase. Twenty years or more away from retirement, you can still benefit from the power of compound interest.
Paying all the debts
Some families may have credit card balances in their 40s. Removing this burden can free up more money for retirement.
Sign up for a free credit card with 0% interest so you can take the time to pay off your debt. Someone with a $7,000 balance can pay off the debt with $467 over 15 months before interest starts.
Once the debt is paid off and you’ve gotten used to living without the money, increase your superannuation contributions by a similar amount.
Don’t be too conservative
At 40, you’re a long way from retirement, so don’t overinvest, says Ellen Rinaldi, former executive director of investment planning and research at mutual fund company Vanguard.
Rinaldi recommends trimming stocks to 80% of the portfolio and investing the rest in conservative assets like bonds.
Get a comprehensive view of all your assets when reassigning them. It’s not enough to just focus on the 401(k). Consider all your investments. Don’t forget about retirement accounts or benefits from previous jobs, either. You can transfer your old 401(k) to an IRA or your current employer’s 401(k) and invest as needed.
“It happens all the time — people leave money in a 401(k) and forget about it,” said J. Michael Scarborough, CEO of Retirement Management Systems. “They spend more time on vacation than they do in retirement.”
Putting college savings in perspective
Hopefully, you’ve been saving for higher education since your kids wore diapers. If so, you can keep hacking without draining a lot of money from your retirement savings. If you neglected to save for college and your 401(k) is not robust, you may not have enough money to fund both.
Many parents sacrifice their retirement savings to care for their children, even those who have graduated from college. A 2019 Bankrate poll found that half of Americans are risking retirement savings to pay their adult children’s bills — and that could be a big mistake.
“When people are forced to make a choice, they raise their children first. You put yourself last,” said Merl Baker, director of financial advisory firm Brightwork Partners. “They’ve accepted longer hours than planned or expected. Or they’ve accepted a lower quality of life. It’s pretty powerful.”
If you’re determined to help your kids and you’re running out of money, look for compromises that may have less of a negative impact on your retirement savings, such as investing in a family home.
Remember, your children can take out loans for college, but you can’t take out loans for retirement.
How to save money in your 50s
The goal is to save seven times your income by age 55 and eight times your income by age 60.
Benefit from back-up contributions
Turning 50 has many advantages, including back-up contributions, which allow you to pay more into your retirement account. By 2022, those 50 and older can save up to $27,000 in a 401(k) and up to $7,000 in an IRA. Take advantage of these opportunities as soon as possible.
“It’s not hopeless,” said Dee Lee, a board-certified financial planner and author of “Women and Money,” discussing those who haven’t taken retirement planning seriously.
Lee described a couple who found they needed to tighten their belts. If each person pays $10,000 per year to the 401(k) plan, assuming the funds grow at 7% per year, they will each have about $90,000 after seven years, or $180,000 in total between them.
But that’s a big assumption. Your portfolio may need to be heavily invested in stocks, or even more, if you need to. Historically, stocks (represented by the S&P 500) have returned about 10% per year, while bonds (represented by the Vanguard Total Bond Market Index Fund) have fallen about 1.5% over the past decade. If you’re not ready to invest in stocks, you may be missing your target.
However, those over 50 are often too young to play it safely.
“This is not the time to make money,” Rinaldi said. “You can keep 50-50 in stocks and bonds. But your portfolio needs to grow.”
Determine your retirement budget
How much is enough depends on your lifestyle and costs, potential medical costs, and the type of support you get from your pension plan and Social Security, for example. But when you review your savings goals, be careful not to set the bar too low because you think you’ll spend less in retirement.
“People don’t usually downsize,” says Harold Evensky, board-certified financial planner and founder of Evensky & Katz/Foldes Financial in Coral Gables, Fla. “It’s not uncommon for them to retire with more spending instead of less.”
Complete a comprehensive retirement spending worksheet to see where your money is going when there’s no more paycheck.
For a more personalized account, consult with a certified fee-based financial planner and make sure they put your needs first.
Medical expense plan
Protect your finances from unexpected medical bills. A few large medical bills can quickly drain a lifetime’s savings. According to 2022 Fidelity estimates, a couple in their 60s will need $315,000 to pay for healthcare in retirement.
Then there’s the high cost of extended care in nursing homes. According to the Genworth report, the average annual cost of a private room in a nursing home will be $108,405 by 2021.
With this in mind, retirement planning must include some consideration for future medical expenses. One option is long-term health insurance, which pays for extended medical expenses, including nursing care and assisted living — but it can be expensive.
“It needs to be affordable not just today, but throughout the premium period,” said Marilee Driscoll, founder of Long Term Care Planning Month, a public awareness event in October.
How to save in retirement
When you reach retirement age and it’s time to start saving, you can still save and make the most of your lifetime income by extending it over your lifetime.
Use Social Security to your advantage
Social Security benefits can be an important factor in your retirement plan. Your entitlement to full benefits may vary depending on the year you were born, but you should consider which option is best for you.
For those born in 1960 or later, the full retirement age at which you can receive full pension benefits starts at 67. All people born between 1938 and 1959 receive a full pension at various ages between 65 and 67. You can start claiming Social Security benefits at age 62, but to receive full benefits, you must wait until you reach full retirement age.
Strategically plan your retirement
When you start using the funds you have saved for retirement, determine the best time to use the funds in each account or plan.
Your tax-advantaged account, such as a traditional IRA or traditional 401(k), is most efficient when your income tax rate is low. By contrast, tax-free accounts like a Roth IRA or Roth 401(k) are more beneficial when your income increases, and you can put them into the coffers without raising taxes.
Implementing tax-cut strategies can help you manage your income more successfully in retirement.
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