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Unless you’re planning to work your entire life, you’re probably going to retire someday. How can you ensure you save enough money now to support yourself throughout your golden years?
With many millennials still early in their careers and struggling to pay back student loans, it can be easy for those just starting out to forget the importance of saving for the future. But saving retirement funds during every decade of your working life could help you face a more financially secure retirement.
The Social Security Administration considers 67 to be full retirement age for anyone born after 1959. That’s the age when the SSA begins paying seniors full retirement benefits. Yet many Americans will live well beyond retirement age.
What’s more, many people are behind on saving for retirement. Nearly half of all U.S. households ages 55 and older have no retirement savings, according to a 2015 study by the Government Accountability Office.
Planning for the future may seem daunting given all your monthly expenses. But there are some guidelines you can follow to help ensure you’re financially equipped to enjoy retirement.
Let’s look at the factors that influence how much you’ll need in retirement, and how much you should sock away decade by decade in order to be financially secure in retirement.
Why worry about something that’s so far away?
If you’re in your 20s, 30s or even 40s, it may feel like retirement is in the distant future. But there are a few points to consider before dismissing the idea of building retirement savings earlier in life.
Saving sooner helps your money grow more
Savings and investment accounts — including retirement savings accounts — grow by compounding interest. For example, if you save $1,000 in a high-yield savings account and you’re earning 2% interest on the account, at the end of one year, without having made anymore contributions, you’ll have $1,020. At the end of the second year, with no additional deposits and assuming the same 2% interest rate, you’d have $1,040.40, because your additional $20 in interest from year one will have also gained interest.
The U.S. Securities and Exchange Commission has a compound interest calculator that can help you see just how powerful compound interest can be over time.
The cost of living will likely rise
Life is getting more expensive: The Consumer Price Index, which measures the average prices of goods and services, shows that over the past 20 years prices have generally risen by at least 1 percentage point each year. As of June 2019, the CPI is up 1.6% year over year. Bottom line? The stuff you buy will cost more in the future. So it’s a good idea to start saving for that more-expensive future today.
You may live longer than you expect
Americans are living longer. In 2019, the average life expectancy for a 25-year-old is around 82 for men and 86 for women, according to the Social Security Administration. With Social Security benefits kicking in around 67, young people today can expect to live long after leaving the workforce.
To get an idea of how long you may need to rely on Social Security benefits in retirement, you can check out this life-expectancy calculator.
How much should I save, and when?
Many factors will influence how much you need to save for retirement every year, including how old you are now and where and when you plan to retire.
For example, a 25-year-old has about four decades of work to accomplish their retirement savings goals. By comparison, a 55-year-old is about a decade away from retirement, so their monthly savings may need to be much higher to reach their retirement goals if they’re late to the retirement-savings game.
The average retirement savings you’ll be able to put away now may partially depend on where you live. A recent Credit Karma survey found that suburbanites have about three times as much in their savings accounts as people living in urban areas, and that 40% of people living in suburbs have 401(k) accounts set up for retirement, compared to just 29% of city dwellers.
In addition to what you might expect to receive via Social Security benefits, a general rule of thumb is to save about 15% of your annual salary for retirement each year, or have your full retirement savings total a certain amount of your annual salary — at least eight times your salary by age 67. These recommendations are based on an average salary throughout your lifetime, so you’d need to adjust based on how you think your salary or situation might change as you age. Resources like the AARP retirement-planning tool Avo can help walk you through different retirement-planning scenarios.
You can also check out at the visual below to take a look at one approach for a retirement road map.
How can I build retirement savings?
In the past, many workers were able to take part in Defined Benefit plans (think pensions) in which employers guaranteed their employees some minimum amount after retirement based on things like age and salary.
Now, Defined Contribution plans — programs where employees contribute a certain amount of money to a retirement savings account — are typically the primary way the average American saves for retirement.
401(k), 403(b) or 457(b)
As retirement plans go, 401(k)s are the most common type of Direct Contribution accounts. If you’re a full-time worker in the private sector, the odds are pretty good your employer offers a 401(k). And if you work for certain tax-exempt organizations or certain public sector industries, your employer may offer a 403(b) or 457(b) plan.
Under a traditional 401(k) or 403(b), employees can defer a percentage of their salary before taxes, which is then placed in the 401(k) or 403(b) account. The current maximum contribution for 401(k) and 403(b) plans for workers younger than 50 is $19,000, while the limit for workers 50 and older is $25,000.
Sometimes, employers match a certain percentage of employee contributions. This can be a great way to essentially grow your retirement savings for free, so be sure to take advantage of any employer match if offered.
IRAs are also a common type of Direct Contribution account. Depending on the type of IRA, your savings may be taxed when you contribute to the fund (in a Roth IRA), or when your money is distributed (a traditional IRA).
Currently, federal law prohibits you from withdrawing funds from your IRAs until age 59½ without paying taxes or early-withdrawal penalties (with some exceptions). And you’re limited to only $6,000 in annual IRA contributions if you’re younger than 50, or $7,000 if you’re 50 or older. For Roth IRAs, your filing status and income can further limit your contributions.
Despite these restrictions, contributing to an IRA can be another way to maximize your tax-deferred retirement savings.
Annuities could be a way to guarantee certain set payments following retirement. You buy annuities through an insurance company, which guarantees that it will pay you an agreed-upon amount, either beginning immediately or at a set future date. Some annuities offer fixed interest rates and a guaranteed payout, while some are variable, meaning payments could depend on the stocks or bonds involved in the annuity.
Variable annuities may seem like mutual funds, but they differ because their earnings are tax-deferred, they provide a benefit upon death, and they can provide consistent payouts. But they often come with higher fees than mutual funds or other investments might, and variable annuities aren’t insured by the FDIC.
Though they don’t necessarily offer the tax-deferred benefits of retirement plans, investments in stocks, bonds and even real estate can all be a part of an overall retirement savings strategy. If you choose to pursue savings via the stock market or government bonds, a savings-tracking calculator could be useful. For example, check out FINRA’s savings calculator. FINRA also has resources on how to evaluate a mutual fund or calculate accrued interest on a bond. Consider reaching out to a financial planner for help in strategizing how you’ll save for retirement.
The good news is that even if you currently have a shortfall, there are ways to work toward your retirement savings goals.
Keep a monthly savings goal in mind: If the thought of saving hundreds of thousands of dollars within a few decades is daunting, it can help to break down your goal into smaller, more-immediate goals. Consider your budget, and make sure you’re paying off your debts in addition to planning for savings. Entering retirement with a nice nest egg and no debt could help you stretch your savings.
Remember to save for nonretirement expenses: While it’s important to save enough for retirement, make sure that you have a fund for emergency expenses. And save toward other big milestones — like a car or house — as well. Consider keeping each of these savings funds separate from your day-to-day checking account so that you’re not using potential retirement savings to pay for something in the near-term.
Maximize your contribution to your employer’s 401(k): Because 401(k) contributions come out of your paycheck, a 401(k) can be a great way to automatically save for retirement. Set up your contribution amounts every year and maximize any match your employer offers. Remember, that match is like free money.
Finally, do your best to not undermine your good work by making taxable withdrawals or taking loans from your retirement savings. Every dollar you take out of a retirement account before retirement age is a dollar that’s not working toward growing your retirement income.