- How Much Should You Save for Retirement?
- Retirement savings: how much should I rely on Social Security?
- Retirement savings: how much should I save?
- Retirement savings: what percentage of my income should I save?
- Retirement savings: where should I save?
- More from Money:
- Here’s How Much You Could Have By Maxing Out Retirement Savings
- Maxing Out an IRA
- Maxing Out a 401(k)
- Maxing Out Both an IRA and 401(k)
- How to Grow a Retirement Fortune When You Can’t Max out Accounts
- Final Thoughts
- Use These 401(k) Savings Goals, Your Age
- 401(k) balances by age
- Ages 20-29
- Ages 30-39
- Ages 40-49
- Ages 50-59
- Ages 60-69
- Ages 70-79
How Much Should You Save for Retirement?
Health care costs continue to rise, people are living longer and corporate pensions are an endangered species. What does this mean for your money?
For one thing, it’s more important than ever to save for retirement — but not just by squirreling away money here and there, hoping that it will be enough by the time you’re ready to leave your job. To keep up with inflation, that money also needs to grow over time. That’s why it’s important to invest in the stock market.
“The sooner you start, the more your money is going to be working for you,” says Sri Reddy, senior vice president of retirement and income solutions at Principal Financial Group. “You can make it up over time if you start later, however you’re going to have to save exponentially more to end up with the same kind of outcome.”
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So don’t wait. If you start saving $100 a month with a 6% average annualized return on your investment, you’d have about $46,000 in 20 years, according to Charles Schwab. But if you wait 10 years to start saving and invest the same amount, you’d wind up with just $17,000 20 years from now, since you missed out on some of that early compound growth.
Here’s how much you should save, and how to get started.
Retirement savings: how much should I rely on Social Security?
Social Security is an insurance program run by the federal government that provides income benefits to retirees, certain dependents of beneficiaries, people who are disabled and survivors of workers who have died. According to research earlier this year from the the National Institute on Retirement Security, 40% of older Americans rely completely on Social Security income in retirement to meet all of their expenses.
Once you turn 62, you’re eligible for Social Security if you have enough “work credits,” which you earn each year your annual income. Eligibility for most retirement benefits requires that you earned one credit on average for each year between age 21 and 62, according to the Social Security Administration (SSA).
While you’re eligible to claim benefits when you turn 62, your monthly check will be about 30% less than if you wait until full retirement age (66 if you were born between 1943 and 1954, and gradually increasing until 67 if you were born between 1955 and 1960 — find your retirement age here). At your full retirement age, you receive 100% of your earned benefit. But if you can hang on until age 70, you’ll collect 24% to 32% more than your benefit at full retirement age.
Even if you’re able to wait until age 70 for a fatter check, Social Security should not make up your entire retirement income plan. According to the SSA, retirees on average receive 40% of their pre-retirement income via the program. So make sure you are saving elsewhere.
Retirement savings: how much should I save?
The amount you need to have saved up by the time you retire depends on several factors. The two big ones are when you want to retire and what you want your lifestyle to look in retirement.
“People’s views of what they want to do in their second chapter varies very drastically,” Reddy says. After all, traveling the world will cost much more than sitting on the couch and reading books from the library.
But you don’t have to be certain about your future to make a plan.
If you want to have a lifestyle in your retirement consistent with the one you have during your career, Fidelity’s rule of thumb is to try to save 10 times your income by the time you’re 67.
That means saving one times your salary by the time you’re 30, three times your salary by age 40, six times your salary by age 50 and eight times your salary by age 60.
And keep in mind that all the planning in the world is not going to make up for unexpected events, losing a job, getting a divorce, or having health problems.
Have a plan and work towards a goal, but recognize that it’s okay if it goes off track, Reddy says. When that happens, he recommends reassessing your income, savings, future outlook and goals and adjusting your plan as needed.
Maybe you could push your retirement date out, for example, to save for a few more years.
Remember: if you’re struggling with making a plan on your own, you might want to hire a financial advisor who can help you out.
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Retirement savings: what percentage of my income should I save?
Once your paycheck hits your bank account, it can be hard to part with any of it. That’s why it’s best to automatically divert some money to your retirement account first, before you can touch it. Fidelity recommends saving 15% of your income to reach that 10 times your salary savings goal by the time you’re 67. That percentage includes your employer’s match, if you have one.
That 15% might seem a lot, especially when you’re just starting out in your career and are juggling other financial priorities.
The important thing is to save what you can as early as you can and try to grow that percentage over time, says Melissa Ridolfi, vice president of retirement and college planning at Fidelity Investments.
So if you’re starting out with a 401(k) contribution that doesn’t get you to that 15% total, try to bump it up each year, or whenever you get a raise.
And remember that once you enter the workforce after college, your income will ly keep increasing — but that doesn’t mean you should keep upping the cost of your lifestyle, Reddy says. The more you upgrade your car and house, for example, the more you’ll need to save for retirement to keep up with that kind of lifestyle.
“Enjoy your life,” Reddy says, but if you get a raise of 3-4%, pocket 1-2% then put the rest towards savings. “You probably won’t miss it if you don’t have it.”
Retirement savings: where should I save?
Saving so much for later in your life might seem overwhelming, but there are tools to help: tax-advantaged retirement savings accounts, which can help you make the most of your savings. Some are connected to your employer, while others are attached to you individually and follow you throughout your career.
A 401(k) account is connected to your employer. A traditional 401(k) allows savers to invest tax-deferred dollars and postpone paying taxes until they withdraw money from the account as retirees.
Many employers offer a 401(k) employer match, so if you contribute 3%, for example, the company will also contribute 3%.
Everyone should at least contribute enough to get the maximum match from their employers, Ridolfi says.
“If you don’t, it’s leaving free money on the table,” she adds.
Then over time, aim to contribute a higher percentage of your income to your 401(k), even if your employer only matches up to a certain point.
If you’re a gig worker or otherwise don’t have an employer who offers a 401(k) benefit, an individual retirement account (IRA) might make sense for you.
With a traditional IRA, you contribute pre-tax dollars, and with a Roth IRA, you pay taxes upfront but then withdraw money tax-free in retirement.
You can open up either kind of account at any of the major brokerage companies, including Charles Schwab, Fidelity or TD Ameritrade.
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If you’re early in your career and believe you’ll be making more later in life, a Roth IRA might be your best bet. This way, you pay your income taxes when you’re in a low tax bracket and can enjoy tax-free withdrawals when you’re presumably in a higher bracket later in life.
If your employer offers a high-deductible health insurance plan with a health savings account (HSA), Reddy recommends taking advantage of that too.
You can make tax-deductible contributions to these accounts to help pay out-of-pocket medical expenses.
And once you turn 65, you can make withdrawals for qualified medical expenses tax-free, giving you even more of a tax advantage than a 401(k) or IRA.
Overall, it’s all about knowing your options, and picking the ones that makes the most sense for you.
“Having a plan is the most important thing you can do,” Ridolfi says. Decide how much you’re going to save, how you’re going to save and increase those savings when you can.
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Saving for retirement is simple. It’s simple to set money aside in a 401(k) or IRA. It’s also simple to invest it in a diversified, three-fund portfolio. As simple as retirement saving is, however, it’s not always easy.
When you’re just starting out, the idea of building a six- or seven-figure retirement fund is daunting. It can seem impossible to turn an average income into a large retirement portfolio.
The good news for young savers is that time is on your side. In fact, just maxing out an individual retirement account (IRA) can put you on the right track to a comfortable retirement. And even those who start later can benefit from years or decades of compound returns to help them reach their retirement goals.
To demonstrate this, we’ll look at just how much money you could accumulate if you maxed out your retirement accounts. We’ll assume that you start saving for retirement at age 25 and retire at age 70, but we’ll also look at scenarios for those who start later. Let’s start with an IRA.
Maxing Out an IRA
The contribution limit for IRAs in 2020 and 2021 is $6,000. Those 50 or older can contribute an extra $1,000, but we’ll keep things simple by sticking with the $6,000 contribution limit. We’ll also assume that the limit never goes up, even though it does inflation. Finally, we’ll assume a 5% after-inflation return on our investments.
If we max out an IRA at $6,000 a year from age 25 to 70 these assumptions, we retire with just over $1 million. Keep in mind this is assuming an after-inflation return of 5%. That is an important assumption. If the after-inflation return is 4%, our total goes down to $757,000. If it’s 6%, the total jumps to $1,388,000. We’ll continue to assume a 5% return going forward.
There is an important aspect of this $1 million portfolio that shouldn’t be overlooked. While the account grew to more than $1 million, the contributions amounted to just $270,000 ($6,000 x 45 years). In other words, compounding accounted for more than two-thirds of the final account balance. This is how someone making even an average income can still build a sizable retirement nest egg.
Maxing Out a 401(k)
The contribution limits for 401(k) and similar workplace retirement accounts are higher than those for IRAs. In 2020 and 2021, the contribution limits for those younger than 50 is $19,500. As with IRAs, this limit goes up most years by the rate of inflation, but we’ll assume it never goes up in our calculations.
With the much larger contribution, our total balance grows to more than $3,310,000 after 45 years, and it would be even larger with an employer match. A common match is $0.50 for every $1 contributed by the employee, up to 6% of salary. Including this or similar matching contributions could increase the total balance at retirement by $500,000 or more.
As with the IRA, the majority of the final account total comes from compounding. In this case, contributions amounted to $877,500 over 45 years while almost $2.5 million came from compounding returns.
At this point, some may object that most people in their 20s can’t max out an IRA, let alone a 401(k). We’ll come back to that, but first let’s look at maxing out both an IRA and 401(k).
Maxing Out Both an IRA and 401(k)
For those high achievers, maxing out both an IRA and 401(k) over a career will generate substantial wealth. Using the assumptions above, a total annual contribution of $25,500 (IRA + 401(k)) generates about $4,329,000.
To highlight the power of compounding, let’s consider again the changes in our balance if we make “small” adjustments to our 5% return assumption.
Moving it down to 4% lowers our ending balance from slightly more than $4 million to just over $3 million, a 25% decline. wise, if we increase the returns to 6%, the ending balance jumps to almost $5.9 million.
This math alone should tell you all you need to know about the destructive power of “just” a 1% advisor fee or the impact of high investment expense ratios.
How to Grow a Retirement Fortune When You Can’t Max out Accounts
Now let’s mix in a bit of reality. Many people in their 20s or even 30s either can’t max out retirement accounts or have other financial priorities, paying down debt, buying a home or saving for a child’s education. To acknowledge that, let’s assume that one doesn’t start saving for retirement until age 35. That reduces our time to retirement to 35 years.
The first thing to recognize is that a 10-year delay in retirement savings has a significant effect on the outcome of our portfolio, assuming the same contribution rate and returns:
- IRA: $571,000, down from $1 million
- 401(k): $1.85 million, down from $3.31 million
- IRA and 401(k): $2.42 million, down from $4.33 million
In other words, a 10-year delay cut the portfolio almost in half. While you still end up with much more than you originally contributed, it’s clear the early years matter.
If you can’t max out your retirement accounts early in your life, strive to save as much as you can for retirement as early as possible. Saving even smaller amounts can go a long way to establishing a financially secure retirement. If your employer offers a retirement match, you should aim to contribute at least enough to qualify for the full employer contribution.
Now, let’s see what happens if you start saving a smaller amount, $3,000 a year, at 25. Then, once you’re more established and financially secure, you begin maxing out your IRA, 401(k) or both at the age of 35:
- IRA: $795,000, up from $571,000 if you waited to start contributing anything until 35
- 401(k): $2.08 million, up from $1.85 million
- IRA and 401(k): $2.65 million, up from $2.42 million
In other words, the extra $30,000 saved over the initial 10 years translated into $200,000 or more at retirement.
Retirement accounts give us an opportunity to save for our golden years in a tax-advantaged account. If you start early, the power of compounding can turn relatively modest monthly or annual contributions into life-changing wealth.
Even if you can’t max out an IRA or a 401(k), starting with much smaller amounts can still put you on the right track to retirement savings. And if you weren’t able to start contributing in your 20s, starting now with what you can positions you to benefit from compounding for the years or decades that sit between you and your retirement.
Use These 401(k) Savings Goals, Your Age
Photo: PM Images (Getty Images)
When it comes to your 401(k), it’s never too late to start saving—but how much should you save? As your savings tend to increase as you get older, a look at average savings by age group can help track your progress if you’re relying on your 401(k) for retirement. Here’s a look at some new numbers for 2020, according to Fidelity.
It’s worth noting, however, that this is not a full assessment of your retirement preparedness, nor does it factor in your savings, possible inheritance, or other retirement accounts.
As only 32% of Americans have a 401(k), a retirement calculator will offer a more accurate assessment of your overall retirement savings progress.
Also, Fidelity’s provides average numbers, not median, which means they skew higher due to a smaller pool of millionaires in the data set.
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401(k) balances by age
For each age group, benchmark goals recommended by Fidelity are included to help you decide whether you’re on target or need to increase the percentage of your contribution from your income to catch up.
- Average 401(k) balance: $10,500
- The average contribution rate: 7% of compensation
- Goal by age 30: save the same amount as your annual salary
It’s not easy to save in your twenties—many people are new to the job market or are still in school—but it’s always good to put away what you can as early as you can, as compound interest is definitely your friend. A dollar saved in your twenties is worth $10 saved in your fifties.
- Average 401(k) balance: $38,400
- The average contribution rate: 8% of compensation
- Goal by age 40: 3x your income
By your thirties, you might have been promoted or earn more money—and with any increase in wage you might want to automatically bump up your contribution percentage to stay on track.
- Average 401(k) balance: $93,400
- The average contribution rate: 8% of compensation
- Goal by age 50: 6x your income
These are your peak earning years, and by now, your student debt has ly become more manageable or even paid off by your mid-forties.
- Average 401(k) balance: $160,000
- The average contribution rate: 10% of compensation
- Goal by age 60: 8x your income
Behind on your savings? Not all is lost. The IRS lets this age group use what’s known as “catch-up contributions,” whereby participants can contribute an extra $6,000 a year to their 401(k).
- Average 401(k) balance: $182,100
- Contribution rate: 11% of compensation
- Goal by age 67: 10x your income
Many people start to retire or draw down their 401(k) balance at this age, which means the median balance doesn’t move much. This is the age when your balance begins to drop.
- Average 401(k) balance: $171,400
- Contribution rate: 12% of compensation
- Goal by age 79: 10x your income
The recently passed SECURE ACT allows people to hold off on taking required minimum distributions (RMDs) from their 401(k) until the age of 72, instead of 70 and a half years. Most retirees will start to make withdrawals in their 70s, which is why the average total balance is less than the 60-69 age bracket’s average total.
Again, if these numbers scare you, don’t worry—they don’t necessarily reflect the full picture of your finances.
You might be wondering then: How much should you save overall for retirement? Ten times your income is a common rule of thumb recommended by Fidelity, but that might go up or down depending on your living standards or expenses.
If you’re not sure how much to aim for, meet with a financial advisor who can help you fine-tune your savings plan.
This story was originally published Nov. 12, 2020 and has been updated March 10, 2021 with new information.
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