This answer can vary widely depending on the person. Your current income and your lifestyle matter a lot. In 2019, Schwab Retirement Plan Services discovered two things. The first one is that 401K participants believe they need $1.7 million, on average for retirement AND most are not on track to get there. What do you think you might need? Do you have a goal amount? Where in the heck did people come up with the 1.7 million number? How do you go about getting there?
Important in Planning
1) The amount needed for retirement depends on your current income and the lifestyle you want to maintain in retirement (goals and plans).
2) Most Americans are NOT saving enough to meet their goal.
3) Knowing how much you “need” by your preferred age of retirement can help you stay on track to reach your stated goals. There are some formulas that you can use.
Saving or Investing?
Do you see yourself as a saver or an investor? It may just be semantics, but there is an important distinction. An investor tends to have a more long-term mindset where saver is more directed toward short term. According to Schwab, 64% of people think of themselves as a saver and not an investor. Because of this, 54% of 401K participants tend to put additional retirement funds in savings instead of another type of account like an IRA or brokerage account. Unfortunately, this strategy can hurt you financially since savings accounts traditionally pay much lower returns (if any) compared to investment accounts.
The other problem with retirement funds is that most people are on auto pilot and have the mindset of set it and forget it. Once you decide on your contribution, have you ever increased it? Are you maxing out the amount that you can contribute? Do you even know what it is? Schwab says that a third of the people who have 401K’s have never increased their amounts since they set it up. 44% have made no adjustments. No changes at all.
Paying attention to your amount of contribution for your 401K is very important. Don’t forget about your IRA’s, brokerage accounts and even HSA’s (Health Spending Accounts). You may even benefit from a professional who does it for a living. It’s a wise decision to seek helps when you’re swimming in uncomfortable waters.
How Much Do You Need?
Many experts recommend that you have 80% of your final (pre-retirement) income. So, if you end up making $100,000 annually upon retirement, you should have a goal of $80,000 per year to live a comfortable lifestyle after exiting the workforce. You can also adjust this amount if you have other sources of income, such as social security, pensions, side hustles, or inheritances. Your health and desired lifestyle should also come into play. If you want to travel extensively, you may want to add in some extras for doing those things that you’ve always wanted to do.
4% Rule
The 4% rule is that you take your desired retirement income and divide it by 4%. Thus, the 4% rule. For our example of $80,000 per year needed to live comfortably, you would need an amount of 2 MILLION ($80,000/.04) to live at a similar lifestyle from at the time of retirement. **The 4% rule only works if you stick to it. If you take one year to splurge on an amazing vacation or some other large purchase, you may be derailed. Your compound interest will be affected as well as your annual income.
Savings by Age
Knowing how much you need to save at each stage of your life has you ahead of the game. It helps you answer the important question of how much you will actually need for retirement. Let’s take a look at two formulas that can be helpful per Investopedia based on your age to get you on the road to retirement.
Percentage of Your Salary
To be ablet to gauge that you’re on track, it is useful to think in terms of the percentage of your salary. Fidelity says that by the time you’re age 30, you should have accumulated your goal in annual savings. Meaning $80,000 from our previous example. This requires you to put aside 15% of your gross salary beginning at 25 at the latest and investing at least 50% of that in stocks.
Would it surprise you that in the Schwab study, 50% of the participants contributed 10% or less in their 401K’s. Unless your employer offers some sort of matching, this will not be enough. Fidelity recommends the additional benchmarks by age.
· Age 40-two times your annual salary ($160,000 in our example)
· Age 50-four times your annual salary ($320,000)
· Age 60-six times your annual salary ($480,000)
· Age 67-eight times your annual salary ($640,000)
More Aggressive
If $640,000 may not be enough to retire comfortably for you, you might choose to take a more aggressive approach. Socking away 25% of your income and starting in your 20’s is a better tract to take. 25% may seem overwhelming, but this would include all of your investments, matching from your employer and any types of savings. If you follow this formula, you should accumulate your full annual salary by age 30.
· Age 35- two times your annual salary ($160,000 in our example)
· Age 40-three times your annual salary ($240,000)
· Age 45- four times your annual salary ($320,000)
· Age 50-five times your annual salary ($400,000)
· Age 55- six times your annual salary ($480,000)
· Age 60-seven times your annual salary ($560,000)
· Age 65- eight times your annual salary ($640,000)
It takes more sacrifice up front, but yields larger returns on the backside. The reality of saving for retirement is that unexpected life events can throw a wrench in things. Items such as home repairs, credit card debt, monthly expenses, and medical issues can derail even those with the biggest focus.
The Bottom Line
Most of us have some space to boost up our savings during our lives. Your company 401K is a great place to start. A personal Standard or Roth IRA (Individual Retirement Account) is another option. If you’re self-employed, a SEP (Simplified Employee Pension) is the way to go. Let’s review the maximums for each level of saving.
In 2021, the maximum amount that can be saved in your 401K (company sponsored retirement plan) is $19,500. If you’re over 50, it caps out at $26,000. If you don’t have a company sponsored retirement plan or want to set aside additional money, the maximum contribution for a Roth or standard IRA (Individual Retirement Account) is $6,000 and for those over age 50, $7,000. If you are self-employed, you would instead have an option to get a SEP (Simplified Employee Pension). The 2021 amounts are 25% of the employee’s salary or a max of $58,000. Important to note that 401 is pre-tax dollars; that means even more savings for you. For a 403B, it is $119,500 for 2021 and $26,000 for those 50 or older.
Can I Contribute to My 401K AND My IRA?
You may be able to contribute to both your employer sponsored plan as well as an IRA, but it depends on your income level.
Filing as a single individual: If you make less than $125,000, you can contribute up to $6,000.
If you make between $125,000 and $140,000, it is prorated based on the exact income.
If you make over $140,000, you are not eligible to contribute to an IRA and receive a tax deduction*.
Filing married: If you make less than $198,000, you can contribute up to $6,000.
If you make between $198,000 and $208,000, it is prorated based on the exact income.
If you make over $208,000, you are not eligible to contribute to an IRA and receive a tax deduction*.
*You can still make the deduction if your income is larger, but you will not get a tax deduction for it. However, they will help your future retirement amount grow. Another choice would be other investment options.
If you’re starting late in the game, you may not be on track to retire in the lap of luxury or even at the level you had hoped. Even though the best time to start would’ve been in your 20’s (or even earlier), there’s never a better time going forward than today. Delaying will only make things harder. Start today where you are and grow from there. What is your goal?
Comentarios