Saving for Retirement

They'll be your golden years if you plan them right.

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In Your 20s

When it comes to saving for retirement, Americans seem to be all over the map. Here’s a glimpse into where individuals, as a whole, stand in their retirement planning.

• From a GoBankingRate survey: 33% of respondents had no retirement savings and 23% had less than $10,000. After that, 13% had over $300,000 in their retirement savings.
• From an Economic Policy Institute report: The mean retirement savings of all working-age families (between 32 and 61 years old) is $95,776.
• From the Wells Fargo Millennial Study: Only 52% of those surveyed had access to 401(k)-like retirement savings plans.

How Much Should I Save for Retirement?

Some people think they need $1 million dollars. Other people want to have 70 – 90% of their pre-retirement income in savings. There is no one-size-fits-all answer to that question. However, most of us would feel more comfortable with our retirement planning if we felt that we were moving in the right direction. As a guideline, follow the rule of thumb used by Fidelity Investments. They recommend having 10 times your final salary in savings at retirement.

To help you hit mini-milestones along the way, they break down savings guidelines even further.

• By 30: Have the equivalent of your salary saved
• By 40: Have three times your salary saved
• By 50: Have six times your salary saved
• By 60: Have eight times your salary saved
• By 67: Have 10 times your salary saved

Why Is Starting Young So Important?

In general, most young people start a full-time career when they are 22 or 23. Americans reach “official” retirement age at 66, which is forty-plus years later. So what’s the rush in getting started right away? The answer is simple . . . compound interest!

Compound interest is how the sum of your money grows and builds upon itself over time with the help of interest. Here’s an example from investor.gov:

• You invest $1,000 in a long-term savings plan that earns 3% interest per year. For this example, you let this amount grow with no additional contributions.
• At the end of the first year, your investment will grow by $30 (3% of $1000). You now have $1,030.
• Next year you’ll gain 3% of $1,030, which means your investment will grow by $30.90.
• Jump ahead to 40th year and your investment stands at $3,262.04 and grew $95 from the previous year. This is 3x as quickly as it grew in year one.

When you delay your retirement savings until you’re a 30-something, you’re losing out on almost ten years worth of compound interest.

Getting Started with Retirement Savings

Start the Savings Habit with an Emergency Fund

Your first step in retirement planning is to get into the habit of setting aside money into savings and ensure your financial security right now! You can do this by starting an emergency fund. Your emergency savings should be enough to cover three to six months of expenses and will help you in situations like loss of employment, a major car or home repair, or medical emergency.

Starting a successful savings habit means that your savings need to include more than whatever dollars are left over at the end of the month. Instead, you need to make savings a line item in your budget and “pay yourself” a set amount each month.

Open a money market or share certificate account for your emergency fund, where it can earn a higher interest. The key is to keep the money in a separate account where you won’t be tempted to access it regularly, but also choose an account where you won’t be penalized for accessing your money quickly if the need arises.

And don’t forget, your emergency savings should not be “set it and forget it.” As your income grows and your monthly expenses increase, readjust the amount in your savings to ensure you still have the ability to cover several months’ worth of expenses.

Retirement Savings for Beginners: 401(k) Accounts

Once you’ve got emergency savings in place, and saving has become a habit for you, you can move onto long-term retirement savings by starting a 401(k) account if it’s offered by your employer.

A 401(k) is a great retirement savings tool for several reasons, first of which is the tax benefits. The contributions you set aside for your 401(k) are taken from your paycheck before taxes are withdrawn. This lowers your taxable income and you end up paying less in taxes. Additionally, the money you earn in interest in your 401(k) account is tax-deferred, meaning you don’t pay taxes on the earnings until the funds are withdrawn, typically in retirement.

The other benefit that most young workers receive from a 401(k) account is an employer match. Many employers will match your 401(k) contribution up to a certain percentage, essentially doubling your investment. The most common matching options that employers offer are percentage matches (ex: your employer matches up to 3-5% of your contribution) or fixed matches (ex: your employer matches dollar-for-dollar up to a certain percentage of your contribution). Whatever you decide to contribute to your account, ensure that you’re taking full advantage of what your employer is willing to match.

In Your 30s

Your 30s can be a tricky time for retirement savings because your finances no longer have a singular focus. You might still be paying off student loan debt, applying for a mortgage, and starting college savings for your children — all at the same time that you’re working to grow your retirement savings. Here are a few things to think about when you’re in your 30s.

Paying Off Your Non-Mortgage Debt

Retirement planning can definitely be stalled if you’re also carrying a lot of non-mortgage debt, which includes credit card debt, student loan debt, auto loans, or other personal loans. These examples, with the exception of student loans, are classified as bad debt as they do not work towards increasing your net worth. If your monthly expenses include a $300 student loan payment and a $400 auto loan payment, think about how that $700 a month could begin earning compound interest to your long-term savings instead.

There are two methods of debt reduction that can be used to pay off outstanding debt — the debt snowball method and the debt avalanche method.

Debt Snowball Method – In an effort to gain momentum and confidence, some experts suggest paying off your debt from smallest to largest. When your smallest debt is paid off, you then apply all the money you were paying there to the next smallest debt, and so on.

• List your debts from smallest to largest.
• Pay as much as possible on your smallest debt.
• Continue minimum payments on all other debts.
• When your smallest debt is paid in full, put all extra funds towards your next smallest debt.
• Repeat until each debt is paid in full.

Debt Avalanche Method – This strategy is aimed at limiting the amount of interest you’ll pay on your debts while working to pay them off. Here you’ll concentrate on paying off the loan with the highest interest rates first and then working downwards.

• Find the loan or credit card charging you the highest interest.
• Pay as much as possible on your high-interest debt.
• Continue minimum payments on all other debts.
• Once you achieve zero balance, move on to the debt with the next highest interest rate.
• Repeat until each debt is paid in full.

While it may take a little longer to reap the rewards of paying off higher interest debt over smaller balance debt, you’ll be saving yourself a lot of money in the long run.

Think Beyond Your 401K with IRA Investments

Hopefully, you’ve continued to contribute to your employer-sponsored 401(k) over the past decade. If you’ve been an aggressive contributor, you’ve learned that your 401(k) plan has a yearly contribution limit. In 2017, the contribution limit was $18,000 per year.

If you’ve met the maximum limit but want to do more to grow your savings, look into adding an Individual Retirement Account (IRA) to your portfolio. Unlike 401(k) plans, these accounts are not tied to your employment and can be opened at your credit union or bank or through a financial advisor. But very similar to a 401(k), your contributions will be put into an investment account, where they will grow through earnings. Also like a 401(k), IRAs offers unique tax saving benefits as you grow your retirement nest egg.

There are two common kinds of IRAs – a Traditional IRA and a Roth IRA. Here’s a breakdown on the specifics of each account.

Traditional IRA – Contributions to a Traditional IRA are tax-deductible and your earnings are not taxed. However, the withdrawals you make when you reach retirement will be taxed as income. You are allowed to contribute $5,500 per year (or $6,500 per year once you reach 50 years old).

Roth IRA – Contributions to a Roth IRA are not tax deductible. However, your earnings grow tax-free and you will not need to pay taxes when you begin withdrawing from your account at retirement. You are allowed to contribute $5,500 per year (or $6,500 per year once you reach 50 years old). However, if you earn more than $118,000 per year individually or $186,000 per year jointly, you maximum yearly contributions will decrease.

Wherever you invest your retirement dollars, a 401(k), an IRA, or a combination of both, a general rule of thumb from most investment experts is that you should be saving at least 15% of your income for retirement.

A New Job and an Old 401(k)

You may see some exciting career advancement or a new career altogether in your 30s. As you continue forward on a career path, don’t forget all that money you worked so hard for in the past! When you leave a company, you have three options on how to handle your 401(k) account – cash it out, leave it in place, or roll it over into a new account.

Cash Out – This is almost never a good option. Not only are you penalized 10% for early withdrawal, if you don’t put the money into another qualified retirement account within 60 days it will be taxed as income. Additionally, your employer is required to withhold 20% for the IRS.

Keep in Place – While your old 401(k) can continue to grow through earnings, you will not be able to make any additional contributions to the account. As you cut ties with an old employer, you may be less likely to keep close tabs on your money which can, in turn, underperform.

Roll Over – With a rollover, your 401(k) funds are sent directly to an IRA account that you hold or, in the case of an indirect rollover, the funds come to you and you have 60 days to deposit them into a new retirement account. The 20% IRS withholding will still apply.

When you’re changing jobs, also be aware of something called “vesting.” With many employer-sponsored retirement benefits, you need to work there for a set period of time before you become eligible for full benefits. For example, you may be able to keep 20% of your employer’s 401(k) match after a year, an additional 20% after another year, and so on until you are “fully vested” and can keep 100% of the contribution.

In Your 40s

Your 40s bring with them some major decisions that need to be made about your retirement savings. You may find yourself in a debate about saving for retirement or paying for a college education. You may also be caught in the dilemma of whether to enter your retirement years mortgage-free or to keep making mortgage payments and enjoying the tax benefits.

Your Retirement or Your Children’s Education?

Sage advice is that you should not pay for your children’s higher education at the expense of your own retirement savings. While your children have the option of applying for student loans to help ease the cost burden, there is no option to finance your retirement years. The best way to pay for college expenses is through savings, financial aid, income, and student loans. However, if it comes down to it, wealth management professionals explain that there are options for borrowing from your retirement savings.

401(k) – You can borrow money directly from your 401(k) account if your employer-sponsored program allows for it. You’re able to borrow $50,000 or 50% of your account value (whichever is less) at an interest rate that is a point or two above the prime rate. However, if your employment is terminated by you or your employer, you have 90 days to repay the loan in full. If it is not repaid, the loan will count as a withdrawal, and you’ll pay any penalty fees and the withdrawal will be taxed as income.

IRAs – You can withdraw money from your IRA at any time and the money can be used for any purpose. However, you will be charged a 10% penalty fee and your withdrawal will be taxed as income if you withdraw funds before you’ve reached the age of 59 1/2. Fortunately for you, using a withdrawal for the purpose of paying for college comes with a break. When paying for qualified higher education expenses, you will not be charged a penalty fee for early withdrawal.

Retire Without a Mortgage?

Starting out your retirement debt-free is one way to ensure that most of your savings can be put directly towards day-to-day living. Since mortgage debt is the largest debt that most people carry, there is a huge advantage to entering your retirement years with no mortgage. But there are some instances where pushing to pay off your mortgage may not be the best financial decision.

The Case For Paying Off Your Mortgage – If you have the cash in a savings account that is not your retirement savings and you’ll still have healthy savings afterward, then go ahead and pay off your mortgage.

The Case for Not Paying Off Your Mortgage – If you’re also carrying high-interest debt, like credit card debt, you should focus your priorities there instead of on your mortgage, which has a lower interest rate. Additionally, if the cash for paying off your mortgage comes from your retirement accounts it may be best to keep your mortgage in place. This is because the money you withdraw from your retirement accounts will be taxed as income.

In Your 50s and Beyond

When you reach your 50s, retirement stops looking like a far-off concept and becomes something you start anticipating. It’s also the time to make a final push in your retirement savings and the time to give some serious thought as to how you will finally utilize the money you worked so hard to accumulate.

Take Advantage of Increased Contributions

In an effort to give your savings an extra boost as you get closer to retirement age, many retirement accounts allow you to increase your yearly contributions. Both Traditional and Roth IRAs allow you to increase your maximum annual contribution to $6,500 once you reach the age of 50. Additionally, you can also make larger catch-up contributions to your 401(k) account as well. Individuals who are 50-years-old and older can contribute an extra $6,000 per year to a 401(k) account.

Making Decisions on Accessing Your Money

After working so hard to grow your nest egg of savings, you’ll need to have a plan in place for using the money in your retirement accounts. Most retirement plans have rules in place for when you can begin accessing your money without paying penalty fees. Whether you’re going to access your money as soon as you can or you’re going to let it grow for as long as possible, here are some deadlines you need to know about.

IRA Accounts

You may begin making withdrawals from your Roth IRA account if you are at least 59 1/2 years old and your account has been open a minimum of five years.

With a Traditional IRA, you may begin making withdrawals when you reach the age 59 1/2 but you must begin making withdrawals by April 1st during the year your turn 70 1/2 years old.

Social Security Benefits

At this point in your life, it’s possible that you’ve been in the workforce for over 30 years. In that time, you have paid 6.2% of your earnings into the Social Security. So you might be eager to start cashing in your Social Security benefits and getting “repaid.” But as you approach retirement age, it may actually be to your advantage if you can delay the start of your benefits.

Currently, the Social Security Administration recognizes that full retirement age is 66 and at this age you can apply to receive 100% of your Social Security benefits in monthly payments. It is also possible to apply for early benefits, starting at age 62, but you will receive only 75% of your full benefit. At the same time, you can also delay the start of your benefits up until the age of 70. And, if you do, you can earn up to 132% of your full benefits.

Let’s say the full Social Security benefit that you’re entitled to is $1,000 a month.

• Start receiving benefits at 62 and you’ll receive $750 per month
• Start receiving benefits at 66 and you’ll receive $1,000 per month
• Start receiving benefits at 70 and you’ll receive $1,320 per month

So, if your financial landscape allows you the opportunity, consider delaying the start of your Social Security benefits for a few years to maximize your benefits.