Last updated on September 21, 2023
In today’s landscape of escalating healthcare expenses, increased lifespans, and fading corporate pensions, the implications for your finances are profound. It’s no longer sufficient to haphazardly stash funds, hoping they’ll suffice post-retirement. The imperative now is for your savings to outpace inflation, necessitating a foray into the stock market.
Sri Reddy, Senior VP of Retirement and Income Solutions at Principal Financial Group, emphasizes the time-sensitive nature: “The clock is ticking—the earlier you commence, the more your money toils on your behalf. While a delayed start can be compensated, the remedy demands significantly amplified savings to attain parity of outcomes.
Act now. Initiate a monthly saving of $100 with a 6% average annual return. In two decades, Charles Schwab estimates you’d accumulate around $46,000. However, procrastination costs – waiting a decade before saving would yield a mere $17,000 in two decades due to missed early compound growth. Read on for optimal saving goals and a kickstart guide.
| Retirement Account | Pros | Cons |
|---|---|---|
| 401(k) | – Employer match\n- Tax-deferred growth\n- Access to diversified investment options | – Limited investment choices determined by employer\n- Withdrawals taxed at retirement |
| Roth IRA | – Tax-free withdrawals in retirement\n- Ideal for early-career growth and future tax bracket hikes | – Contributions not tax-deductible\n- Income limits for eligibility |
| Traditional IRA | – Tax-deferred growth\n- Tax-deductible contributions\n- Access to diverse investments | – Withdrawals taxed in retirement\n- Early withdrawals penalized |
| HSA (Health Savings Account) | – Tax-deductible contributions\n- Tax-free withdrawals for qualified medical expenses\n- Long-term tax advantage in healthcare expenses | – Limited to those with high-deductible health insurance plans\n- Penalties for non-medical withdrawals |
What you'll learn:
➤ Relying on Social Security for Retirement?
Social Security, a government-run insurance program, offers retirement benefits to retirees, disabled individuals, and survivors. Surprisingly, 40% of older Americans depend entirely on Social Security for covering expenses in retirement, as per a recent study by the National Institute on Retirement Security.
Eligibility begins at 62, contingent upon accrued “work credits” tied to yearly earnings. The Social Security Administration mandates earning one credit per year between ages 21 and 62 for most retirement benefits.
Opting for early benefits at 62 incurs a roughly 30% reduction in monthly payouts compared to full retirement age (66 for those born 1943-1954, gradually rising to 67 for those born 1955-1960). Waiting until full retirement age grants 100% of earned benefits. However, holding out until 70 increases payouts by 24% to 32% above the full retirement age benefit.
Yet, relying solely on Social Security is inadequate. On average, Social Security covers only 40% of pre-retirement income, notes the SSA. Hence, alternative savings avenues are imperative. Plan ahead for a secure retirement.
➤ Determining Your Retirement Savings Goal
Calculating your necessary retirement savings hinges on pivotal aspects, chiefly your intended retirement age and envisioned post-career lifestyle.
Sri Reddy underscores the diversity of aspirations for the “second chapter” of life, acknowledging that global exploration contrasts starkly with leisurely reading at home.
Despite uncertainties, crafting a strategy remains feasible. Fidelity advises aspiring for a retirement standard comparable to your working years, suggesting a target of saving 10 times your income by age 67. The formula entails amassing one year’s salary by 30, tripling it by 40, sextupling it by 50, and octupling it by 60.
Nonetheless, life is rife with unpredictabilities: sudden job loss, divorce, health issues. A structured blueprint helps, but adaptable perspective is crucial, notes Reddy. In such instances, reevaluate income, savings, goals, and recalibrate. Adjustments might involve extending retirement timelines for added savings.
Bottom line: While autonomy in planning is commendable, enlisting a financial advisor is prudent for comprehensive guidance.
➤ Retirement Savings & Optimal Income Allocation
Amidst the attachment to one’s paycheck, an effective strategy emerges: funnel a portion directly into your retirement fund, preempting any impulse spending.
This percentage encompasses your employer’s contribution if applicable.
Granted, this 15% might appear substantial, especially as you embark on your career while managing multiple financial obligations. The crux lies in initiating savings at the earliest, then gradually augmenting this proportion, advises Melissa Ridolfi, VP of Retirement and College Planning at Fidelity Investments. Commence with a 401(k) contribution below 15% and incrementally raise it each year or with salary hikes.
Crucially, career progression usually ushers in augmented income. However, a parallel lifestyle inflation is unwise, cautions Reddy. Instead, allocate modestly when income escalates; perhaps pocketing 1-2% of a 3-4% raise and channeling the rest into savings. It’s about relishing life while securing your financial future.
➤ Retirement Savings: Where Do I Save?
Amidst the daunting prospect of amassing substantial reserves for your golden years, there exist powerful tools: tax-advantaged retirement savings accounts, designed to maximize your efforts. These can be employer-linked or personalized, accompanying you throughout your professional journey.
An employer-tied option is the 401(k) account. The conventional variant allows tax-deferred investments, postponing tax payment until withdrawals during retirement. Many employers match contributions, e.g., a 3% employee contribution yielding a corresponding 3% from the company. Essential advice from Ridolfi: secure the full employer match—it’s akin to free money.
Over time, ramp up your 401(k) contributions, surpassing mere matching thresholds.
For gig workers or those without 401(k) perks, an individual retirement account (IRA) fits the bill. A traditional IRA entails pre-tax deposits, while a Roth IRA demands upfront taxes but ensures tax-free withdrawals post-retirement. Choose either type from major brokerages like Charles Schwab, Fidelity, or TD Ameritrade. Navigate these avenues wisely for a secure retirement.
➤ Strategic Moves for Early-Career Savings
When envisioning future income growth, particularly in early career stages, a Roth IRA emerges as an astute choice. By paying taxes at a lower bracket now, you secure tax-free withdrawals later, when earnings are projected to surge—a savvy tax strategy.
Incorporating a high-deductible health insurance plan with a health savings account (HSA) from your employer can be advantageous. These accounts accept tax-deductible contributions, easing medical expenses. Post-65, withdrawals for qualified medical costs become tax-free, surpassing the tax advantages of a 401(k) or IRA.
Comprehensively, it’s about exploiting your alternatives, aligning with your circumstances. Crafting a robust plan holds paramount importance, affirms Ridolfi. Determine your savings quantum, delineate your method, and augment contributions when feasible. This proactive approach primes you for a secure financial future.
