How Can You Start Saving For Retirement Today
There is no reason to wait to start planning for retirement. In fact, many retirement savings accounts are available to help individuals young and old start saving for retirement. These include:
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401 Plans: These employer-sponsored plans enable workers to allocate a portion of their paycheck to their retirement savings. 401 plans accrue interest on a tax-deferred basis, and more than 500,000 businesses across the United States offer these plans.
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403 Plans: Also referred to as tax-sheltered annuity plans, 403 plans are retirement options available to employees at various tax-exempt organizations. Like 401 plans, 403 plans enable employees to make deferred contributions. Also, all earnings and returns on 403 plan return amounts are tax-deferred until withdrawn.
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Roth IRAs: As tax-advantaged individual retirement accounts, Roth IRAs enable an individuals contributions to grow tax-free. With a Roth IRA, an individual can contribute up to $5,500 per year, and the account can even be used in combination with a 401. Plus, those who are 50 or older can contribute an extra $1,000 per year as a catch-up contribution to a Roth IRA.
In addition to setting up one or more of these retirement savings accounts, there are other ways to save for retirement. Lets take a look at three simple, effective ways to boost your retirement savings.
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Are You Ready For Retirement
The thought of retiring at age 55 can seem exciting! But cashing in your nest egg a few years earlier than everyone else could mean that you might need a little more savings than your peers.
Do you know if youre truly ready?
If you havent already, take some time to add up all of your retirement accounts and estimate how long your money will last. An easy way to do this is with the free Retirement Planner from Personal Capital.
How does it work? You simply enter in some basic information about when youd like to retire and how much money youd like to withdraw each year, and then the planner shows you best and worst case scenarios for how many years until you will run out of money. To use the Retirement Planner, simply create a free account, link to each of your retirement accounts, and then like magic you can see a daily snapshot of all of your funds at once. By using your actual retirement account balances, this will help to provide you with the most accurate and tailored-for-you results.
Again, this retirement planner is completely free to use. So I would definitely recommend giving it a try!
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How Much Should You Be Saving
The answer to this is highly personal and depends on your lifestyle and spending habits, but there are a few basic guidelines to follow if you want to retire comfortably.
For starters, Fidelity suggests that everyone set aside 15 percent of their income in a retirement account. “We believe if you save 15 percent throughout your career you will have enough to maintain your lifestyle in retirement,”Katie Taylor, VP of thought leadership at Fidelity Investments, tells CNBC Make It.
That 15 percent can include any matching contributions from your employer, she says.
Other experts, including co-founder of AE Wealth Management David Bach, say that if you set aside at least 10 percent of your income, you’ll set yourself up to be fine. Of course, more is better: Bach adds that if you want to retire “rich,” save 15 to 20 percent.
Another rule of thumb, according to Fidelity, is to have 10 times your final salary in savings if you want to retire by age 67. It suggests a timeline in order to get to that magic number:
- By age 30: Have the equivalent of your starting salary saved
- By age 35: Have two times your salary saved
- By age 40: Have three times your salary saved
- By age 45: Have four times your salary saved
- By age 50: Have six times your salary saved
- By age 55: Have seven times your salary saved
- By age 60: Have eight times your salary saved
- By age 67: Have 10 times your salary saved
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Where Will Your Retirement Income Come From
Once you know what you want to spend, the next question is how much income will you receive in retirement?
Broadly speaking, the money you receive in retirement will be made up of two parts, income and capital:
Income
Income is easy to work out. Its the regular payments you receive into your bank accounts. It will include savings interest, dividends, State Pension, rental income and any final salary pensions.
If youre unsure how much State Pension you will receive, you can get an estimate of your state pension here
The challenging part is working out when the different incomes start and when they may stop. It will be useful to create a retirement timeline, showing all the different events:
Remember, only include your final salary pensions, these are the ones that pay a guaranteed income for life. Your personal/workplace pensions are treated as capital and dealt with in the next section.
Capital
Capital refers to cash or liquid assets being held in accounts or assets such as machinery, equipment or buildings.
Working out how much capital you can withdraw each year isnt so easy. If you withdraw too much, you risk running out of money. Withdraw too little and youll get to the end without living the life you wanted.
Broadly speaking, you canwithdraw around 4% of your capital each year without running out of money.
Income & Capital
Learn Whether You Can Qualify To Supplement Your Income
For many Americans, the balance of their 401 account is one of the biggest financial assets they own but the money in these accounts isn’t always available since there are restrictions on when it can be accessed.
401 plans are meant to help you save for retirement, so if you take 401 withdrawals before age 59 1/2, you’ll generally owe a 10% early withdrawal penalty on top of ordinary income taxes.
However, there are limited exceptions. For instance, if you incur unreimbursed medical expenses that exceed 10% of your adjusted gross income, you can withdraw money from a 401 penalty-free to pay them. Similarly, you can take a penalty-free distribution if you’re a military reservist called to active duty.
Because the exceptions are narrow, most people must leave their money invested until 59 1/2 to avoid incurring substantial taxes. However, there is one big exception that could apply if you’re an older American who needs earlier access to your 401 funds. It’s called the “rule of 55,” and here’s how it could work for you.
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Taking Money From Your Ira Or Old 401 At Age 55
Substantially Equal Periodic Payments is the option for early retirees to access funds in an IRA or old 401 before age 59 1/2 without incurring a penalty. But there are rules.
At a high level, you have the choice of one of three IRS-approved distribution methods. Your required withdrawal is calculated according to the method you selected. You don’t get to decide how much you want to take out and when.
The payments must continue for at least five years or until you turn 59 1/2, whichever is later. If you start a SEPP program at age 55, you’ll be able to stop at 60. Failure to follow the SEPP rules will trigger penalties and interest.
And keep in mind, distributions from traditional 401 or IRA are fully taxable as ordinary income. If the distribution is less than ideal, you’ll wind up with even less to maintain your lifestyle. If you’ve been at your job for a very long time and have a large account, the Substantially Equal Periodic Payments could leave you with little control over your tax situation and force you to take more from your tax-advantaged accounts than you need long before Required Minimum Distributions begin at age 72.
Another option that might be available in some 401 plans is the ability for individuals who retire between age 55 and 59 1/2 to take money from their account after theyve retired and separated from service.
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What Is A Good Pension Amount
What is a good pension amount? Some advisers recommend that you save up 10 times your average working-life salary by the time you retire. So if your average salary is £30,000 you should aim for a pension pot of around £300,000. Another top tip is that you should save 12.5 per cent of your monthly salary.
Health Insurance Options Before Medicare
Unless your spouse is still working and you can join his or her health insurance plan, paying for health insurance on your own may be prohibitive. With Medicare eligibility beginning at 65, what are your options for health insurance if you retire at 55?
COBRA coverage generally only lasts for 18 months if you retire early, and you need 10 years. The public exchanges will usually be more affordable than private insurance, but it’s still really expensive, and the cost varies by state.
According to this calculator from the Kaiser Family Foundation, two 55-year-old adults in Boston, MA would pay a premium of $995 per month in 2020 for a silver plan, assuming they’re not eligible for subsidies. The same couple would pay $1,590/month in Jupiter, FL and $1,359/month in Houston, TX.
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The Importance Of Making A Plan
Monitoring how much you withdraw in retirement against a long-term plan is important. You want a secure retirement income. Having a plan and measuring against it will accomplish this goal while answering the question of just how much you can withdraw in retirement.
Create a retirement income plan, and consult with a retirement planner or tax advisor who can calculate the after-tax impact of your proposed retirement account withdrawals.
What Else Do You Need To Think About
Pensions and inflation: how much will prices rise?
For a while now we have experienced low-interest and low inflation rates. But those of you looking to retire at 55 will likely remember the high inflation of the 1980s. One of the biggest risks to your retirement income is that it wont rise with inflation . As a result, your money will be worth less and less.
Its difficult to appreciate the small but corrosive effect of inflation. Over a 30+ year retirement, a 2.5% pa inflation rate can have a huge impact.
For example, £5,000 of income in 1995 will need to have grown to around £10,000 in 2021 in order to keep pace with inflation.
So if your income doesnt increase with inflation, it could mean living a low budget lifestyle in the future.
Some investments, such as inflation-linked bonds, are specifically designed toprotect against inflation.
When creating your retirement income plan, an independent financial adviser will take these risks into account. They will help you work out the right balance between maximising income today whilst ensuring it is not eroded by inflation over time.
They will also create a withdrawal policy statement, which maximises how much income you can spend in retirement without the risk of running out of money.
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Which Retirement Plans Apply
Although this rule is often most associated with 401 plans, we should clarify that it actually applies to all qualified retirement plans. In general, this would be either a 401 or 403 employer sponsored plan.
Also keep in mind that this rule only applies to traditional-style retirement plans . For those people who love Roth-style plans , these ones do not qualify because the rules associated with Roths are different. With a Roth, contributions are available anytime for withdrawal. Only the earnings have to wait until age 59-1/2.
If you happen to work in a government institution that offers a 457 plan, these plans dont qualify either. But theres a good reason why. 457 plans arent subject to the additional 10% penalty tax to begin with. Participants of this type of retirement plan can start taking withdrawals anytime they wish, and only need to pay the taxes associated with those withdrawals.
Unfortunately this rule does not extend to IRAs. When it comes to an IRA, you simply have to wait until age 59-1/2 unless you meet one of the other special requirements. OR you could use one of the other special early withdrawal techniques like a 72 rule / SEPP or a Roth IRA Conversion Ladder.
You Can Save More If You Want To
The only way to reach financial independence is if you save and learn to live within your means. Before the 2020 pandemic, Americans were only saving roughly 7% of their personal income. Thats pretty pathetic! During the pandemic, the U.S. saving rate ballooned to 33%! Therefore, we can save more if we want to. By 55, we shouldnt have a problem with our finances if we stayed focused.
For the money you are comfortable risking, actively invest the rest of your after-tax savings in real estate, the stock market, bonds, real estate, and basically anything else that matches your risk tolerance.
If youre looking to boost your savings interest rate, check out CIT Bank. CIT Bank continues to have one of the highest rate today. It doesnt have bricks and mortar shops, so it can pass on the savings to you.
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How Much Should You Be Saving For Retirement
There is no one-size-fits-all approach for how much you should save for retirement. That figure depends largely on the lifestyle you want for yourself and your family.
But Fidelity recommends saving 15% of your salary over the course of your career to be prepared for retirement. Here are the benchmarks Fidelity recommends you follow at every age:
- By age 30, you should have the equivalent of your salary saved
- By age 40, you should have three times your salary saved
- By age 50, you should have six times your salary saved
- By age 60, you should have eight times your salary saved
- By age 67, you should have ten times your salary saved
How To Save For Retirement
Fidelity’s saving recommendations assume that an individual has saved 15% of their annual income every year since age 25 and that they invest 50% of their retirement savings in stocks.
Starting to save for retirement as early as possible will allow you to take greater advantage of compounding. Compounding allows you to earn investment returns on not only your contributions but on your previous returns as well. Investing in stocks rather than only in low-risk, low-reward investments like cash and bonds allows for investment returns that, historically, average about 10% per year .
The type of investment account you can use to save for retirement often depends on whether you’re employed by a company that offers a workplace retirement plan. But anyone can, and should, save for retirement, no matter their employment arrangement. Here are your options:
- Individual retirement account : If you don’t have access to a 401, or you want to save extra for retirement, you can open an IRA. These also come in traditional and Roth versions, and the income qualifications and tax treatment differ between the plan types. Like with the different types of 401, Roth IRAs are funded with post-tax income and traditional IRAs are taxed upon withdrawal. A Self-Employed Pension IRA is available to freelancers, the self-employed and sole proprietors, and a SIMPLE IRA is available to small businesses.
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