My AccountThe Who, What, When, Where and How of Retirement Savings
Who doesn’t have dreams of walking out of work on their very last day, enjoying a fun life of retirement…sleeping in, maybe gardening, spending time with friends and family, traveling or spending your days playing with your grandkids? Even when you’re twenty or thirty, a long week of work can inspire you to daydream about retirement. But before these dreams can come true, you have to put in some work planning and saving along the way. Just the words “saving for retirement” can lead to a lot of questions. Here are the answers to the basics.
WHO should save?
The easy answer here is…everyone and anyone who can. As soon as you start working as an adult and start earning paychecks, you should be considering a retirement savings account that fits your situation. It may be hard at first on an entry-level salary and if you are paying off student debt, but anything you put in will have time to compound and can really add up. Plus, starting early will establish good habits that will hopefully last a work lifetime. As your income grows, so can your retirement saving contributions. Start small to get going, even if it is only $5 per week. Increase your savings a little each year and anytime you get a raise, put at least part of it into savings with each paycheck. The key is to contribute money out of your paycheck, so you never miss it.
WHAT should I save?
There is no one-size-fits-all answer to the question of how much to save for retirement. Every person and every situation is unique. Before you know what to contribute to your retirement savings, you have to consider what your future goals are, what kind of lifestyle you’ll want to have, and at what age you’d like to retire. Generally, it is recommended that you set aside 15% of your pre-tax income toward retirement savings.* However, this can vary depending on how early in life you started saving and if your employer is matching any funds. Another rule of thumb is to plan on having roughly 80% of your pre-retirement income saved up for living expenses once you quit working. For example, AARP recommends that if your yearly expenses are $50,000, then your savings income should be at least $40,000.**
Remember, there will no longer be payroll deductions for social security taxes and retirement savings, plus you will be getting income from social security moving forward. You can gain a good idea of how much you will need if you look at your current annual expenses and multiply that by the number of years that you expect to live past your retirement age.
WHEN should I save?
Another easy answer here is…the sooner the better. Did you know if you contribute $2,000 into retirement savings each year for ten years starting at age 25, you’ll have more money at age 65 than you would if you put aside $2,000 per year for thirty years starting at age 35? The important thing is whether you’re in your twenties or in your forties, the earlier you start putting money away, the more time it will have to grow. Start as early as your first paycheck even if it’s just a small amount. And, if you’re a few years down the road from this and you haven’t started saving for retirement yet, know that it’s never too late. Focus on starting today. If you’ve waited a little long and you’re in your thirties or forties or even fifties, there are steps that you can take to help you catch up. Older workers can make “catch up contributions” in certified tax-advantage plans, like a 401k, that let you contribute more to boost your retirement savings account.
WHERE should I save?
The best place to put your retirement savings is in a specified retirement account that lets you contribute pre-taxed dollars to it. The two basic types are 401(k)s and Individual Retirement Accounts or IRAs. Both plans provide certain tax advantages. A 401(k) is offered through employers so it makes it easy to have savings automatically deducted from your paycheck. Plus, many employers provide matching, which means you get free money from your employer. IRAs can be opened through a bank, a brokerage or directly with a mutual fund. Remember, both 401ks and IRAs have annual contribution limits. Be sure to check with your employer or account administrator for these requirements because overfunding an account may have tax implications.
HOW should I invest my savings?
The choice of investments can be a little daunting, but it doesn’t have to be. Generally, the further you are from retirement, the more of your savings you should put in stocks.** This allows for the maximum growth opportunity over your working career. To help avoid the temptation to overreact to either market drops or sudden increases, check on it only occasionally, like once a year, once you invest. The market will occasionally hit a bump but will generally generate strong returns over time. An easy way to invest is to put your money into mutual funds. Mutual funds are simply companies that buy shares in a wide variety of companies. This allows you diversification (not too much exposure to one company or industry). As you approach retirement, consider moving more of your savings to bond mutual funds or CDs. This reduces the risk of any type of market correction right before you retire.
