How Much to Save for Retirement
In Money Management
How Much to Save for Retirement
We work hard to cover our bills and take care of our day-to-day expenses, but we’re not nearly as good at planning for the future.
In 2019, about half of American households had no savings in retirement accounts, while only 21% have saved more than $100,000 towards retirement, according to the 2022 Survey of Consumer Finances, run by the Federal Reserve Board.
It’s never too early or too late to start saving for retirement. However, the sooner you start, the easier it will be to accumulate the money you will need to ensure you and your loved ones can live better once you reach retirement age.
Here we take a look at how to go about saving for retirement, how much to save for retirement at different ages, and how to go about planning for retirement if you are not lucky enough to have an employer-provided 401k fund.
There’s no time like the present to start planning for the future! Read on to learn what you need to know to start planning for a happier and more comfortable retirement.
9 Key Steps to Saving for Retirement
One big reason why people don’t start saving for retirement sooner is that they simply do not know where to start. Here are nine no-nonsense steps to help get your retirement savings strategy off the ground.
1. Set Clear Goals
Sit down with your loved ones and sketch your ideal retirement. Do you dream of traveling the world, living by the ocean, or staying close to friends and family?
It may be hard to imagine now, but setting clear goals for how you want to live when you stop working can help you figure out how to handle your personal finances in the present day.
2. Set a Budget and Save Consistently
Now build a workable budget that covers your current expenses and sets aside a portion each month for retirement savings. Treat retirement savings as a non-negotiable monthly expense like paying your mortgage or auto loan in order to ensure consistent contributions.
3. Eliminate Debt
If you’re serious about freeing up money for retirement, the single best thing you can do is get rid of high-interest debt, such as credit card balances. The interest you are paying today on money you have already spent should be interest you earn on your retirement savings.
4. Maximize Employer-Sponsored Plans
If your workplace offers a retirement plan like a 401k, be sure to take full advantage, even if you are relatively young. Always pay in enough to at least match any employer contributions because this is literally free money that you can use to build a better future.
5. Contribute to an IRA
If your employee does not offer retirement benefits, or even if they do, opening an individual retirement account (IRA) is a good idea. Talk to a financial advisor about whether a traditional or Roth IRA offers the best tax advantages for your situation.
6. Hands Off Your Retirement Savings!
It can be tempting to dip into retirement funds to help fund a college education or property purchase. However, jeopardizing your own future financial security helps no one.
Remember also that early withdrawals from dedicated retirement accounts generally come with hefty fees and possible tax penalties.
7. Plan for Future Healthcare Needs
Unfortunately, healthcare costs inevitably rise with age. Find out how much you stand to benefit from Medicare and consider taking out supplemental health insurance or putting money into a Health Savings Account to cover future medical expenses.
8. Open a “my Social Security” Account
You can stay informed about your social security benefits by creating a “my Social Security” account online. This will give you an idea of how much guaranteed income you can expect and will help you make informed retirement decisions.
9. Take the America Saves Pledge
The America Saves Pledge is a commitment to make saving for you and your family’s future a key priority. By taking the pledge, you commit to specific savings goals, whether it be for retirement, emergencies, or other needs.
How Much Should You Save for Retirement?
Exactly how much you need to save for retirement depends on your expectations for the type of lifestyle you want once you stop working. If you’ve always lived frugally then you’ll need less. But if you’ve earned more you should also be saving more in order to maintain your lifestyle.
That said, retirement life can be difficult to imagine (and budget for) and unexpected medical expenses or financial setbacks can upend even the most careful planning. With that in mind, let’s take a look at what you should look to save at different stages in your career.
How to Save for Retirement at 30
At age 30, assuming you’ve been saving fairly consistently since starting work in your early to mid-20s, many experts suggest you should aim to save around 15-20% of your gross income.
Contributing at this level allows you to tap the power of compounding interest and make the most of investment growth over time.
How to Save for Retirement in Your 40s
By age 40, you should be looking to save around 20-25% of your gross income for retirement. This can be a tough ask, as you are likely also to be juggling a mortgage, raising a family, and saving for your children’s college tuition—but remember that these are also your peak earning years.
By aiming for a higher savings rate at this stage, you’ll be able to offset any shortfall in your savings from failing to save sufficiently in your earlier years.
How to Save for Retirement at 50
At age 50, your focus on retirement savings becomes even more important. Assuming you’ve already been saving consistently, you should still be looking to save between 25% and 30% of your gross income for retirement.
This higher rate should allow you to compensate for any unexpected fluctuations in your savings growth caused by, for instance, a recession or runaway inflation.
How to Make Your Savings Go Further
Of course, the longer you may have delayed saving for retirement, the more you will have to play catch up by dedicating more of your income to retirement savings. Here are some handy tips to help you make the money you have for retirement savings go further.
1. Create an Emergency Fund
Many financial experts suggest setting aside the equivalent of 3-6 months of your average expenses in an emergency fund. This can help prevent having to dip into your savings in the event of a large unexpected expense or unplanned loss of income.
2. Open a High-Yield Checking Account
Consider opening a high-yield checking account to make the most of the money that flows in and out of your account every month.
High-return checking accounts, such as 1st Advantage Federal Credit Union’s High-Yield Checking account, allow qualifying members to earn significantly higher interest on the “working capital” they have on hand.
4. Make Catch Up Contributions After 50
Remember that your contribution limits to traditional and Roth IRAs and many 401k plans increase for those aged 50 and above. This is a valuable bonus in your later earning years to help boost savings. You’ll also score on tax savings and potentially on employer matches too.
How to Save for Retirement Without a 401k
Employee-backed retirement contributions are a great benefit but they’re not as common as they used to be. According to the Survey of Consumer Finances, a quarter of U.S. households aged between 50 and 60 now have a defined benefit retirement plan, down from half in 1989.
Even if you do have a 401k, it’s probably not wise to put all your retirement eggs in one basket. Here are some other smart ways you can boost your retirement savings.
Traditional and Roth IRAs
As the go-to choice for retirement savings beyond what your employer may offer, traditional IRAs offer tax-deferred growth, allowing contributions to be deducted from your taxable earned income, while Roth IRAs allow you to make tax-free withdrawals in retirement.
SEP IRAs, SIMPLE IRAs, and Solo 401k Plans
If you are self-employed or a business owner, Simplified Employee Pension (SEP) IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs let you set up pre-tax accounts similar to traditional IRAs for you and your employees but with higher contribution limits.
Solo or Self-Employed 401k’s allow you to set up accounts similar to a traditional 401k that both an employer and an employee can contribute to. You can also opt for a post-tax contribution Roth version—all with higher contribution limits than personal IRAs.
Health Savings Accounts
If you are enrolled in a high-deductible health insurance plan, you may have access to a health savings account. Not only do these help cover medical expenses, but they can serve as a valuable retirement savings tool.
HSAs allow you to contribute pre-tax dollars that can be invested and grow over time. After age 65, withdrawals for non-medical expenses are penalty-free.
Annuities
Annuities are insurance products that guarantee a regular stream of income in the future in return for a lump-sum payment or periodic contributions during your working years. It’s also sometimes possible to cash out a life insurance policy in return for an annuity.
State-run ‘Auto-IRAs’
Several states have now introduced Automatic IRA programs that require employers without retirement plans to automatically enroll employees, deducting contributions from their paychecks unless the employee opts out.
The plans usually roll funds into a commercial IRA once a certain savings threshold is reached.
Taxable Investment and Brokerage Accounts
You can also accumulate money for retirement by investing in stocks, bonds, or mutual funds using an investment account offered by a brokerage or other financial services company. It’s possible to earn significant amounts by investing wisely, but of course—you can also lose your money.
Bear in mind that your money will be taxed before you can invest it and your earnings will be taxed on withdrawal, usually as capital gains.
Smart Retirement Savings With 1st Advantage Federal Credit Union
Whether you have an employer-sponsored 401k or not, 1st Advantage Federal Credit Union has the tools and expert guidance you need to make retirement saving simple and convenient.
In addition to our high-yield checking and easy-to-use regular savings account options, 1st Advantage also offers members an IRA Variable savings account designed to allow them to take advantage of changing interest rate conditions to build their retirement nest egg.
We also offer IRA products linked to our full range of deposit certificates for safe, predictable long-term wealth building.
Contact us today or click below to learn more about our comprehensive retirement planning services and retirement-focused savings products.