How to save for retirement

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How much money will you need to retire? If you’re like the majority of Americans, you don’t know the answer.

A 2018 Bankrate survey found that 61 percent of Americans don’t know how much they will need to have saved to fund their retirement. Meanwhile, a March 2019 survey found that 21 percent of working Americans aren’t saving at all.

It’s no surprise then that half of working households are at risk of not being able to maintain their standard of living when they retire, according to the National Retirement Risk Index (NRRI) produced by Boston College’s Center for Retirement Research.

There are ways to make sure you stay on track, though. Below you’ll find tips for what you can do to improve your ability to save and what goals you should be aiming for starting today, no matter your age or financial situation

How much money will you need to retire?

When clients ask Dan Tobias, a certified financial planner at Passport Wealth Management in Charlotte, N.C., how much they’ll need to retire, he’s quick to redirect the question by asking what retirement looks like for them.

“Are they looking to drive a Lamborghini, or are they looking to move to a 55-plus type condo in Florida?” Tobias asks.

After Tobias understands the person’s retirement vision, he can apply certain rules of thumb. One is seeing what 4 or 5 percent of your retirement savings is, and what your lifestyle would be like living off that amount. If that number isn’t on target, you’ll have to either increase your retirement contributions or live more frugally during retirement.

Fidelity recommends certain levels of retirement savings as you age.

  • For instance, at age 30 you should have at least your annual salary saved.
  • By the time you turn 40 years old, you should have saved three times your salary.
  • At age 50, you should have six times what you earn annually saved for retirement.
  • By the time you hit age 60, the goal is to have eight times your salary saved – and it should reach 10 times your salary by age 67.

Some advisers go even higher: Merrill lists saving 12 times your salary before retiring as one of its rules of thumb.

Bankrate’s retirement calculator can help you get a better idea of how much money you’ll need and whether you may need to work a few more years than expected. But the most important thing is to be realistic about your goals – and don’t underestimate the creeping expenses of being old, especially healthcare costs.

How to maximize savings on a budget

Even with limited resources, there are ways you can maximize your savings so you don’t find yourself underwater later on.

One trick that can make saving easier is by setting up automatic contributions. If you don’t ever see the money going into your savings, you won’t have the opportunity to miss it. Whether your employer offers direct deposit to multiple accounts or you set your own account to automatically transfer funds into dedicated savings, automatic contributions can be an easy and painless way to integrate savings into your budget.

Another way to direct more funds into your retirement savings is to cut down on your expenses. Then deposit those extra dollars into your savings account until you begin to hit your savings goals.

And forget the scrimping on the occasional coffee: the best place to find savings are your biggest expenses: housing, cars, dining out, travel or whatever you spend big money on.

If you don’t see any cost-cutting options, you could instead look into a side hustle. Whether you decide on freelance work, a part-time job or a passive income option, a few extra hours each week can result in a healthy deposit directly into your savings.

It’s important to integrate saving into your budget now. Americans’ biggest financial regret is not saving for retirement sooner, according to a Bankrate survey. You want to get your money working for you – compounding your gains – as soon as possible.

Retirement accounts: Roth IRA vs. traditional IRA

Once you’ve committed to saving for retirement, you have a choice of how and where to save. One of the most popular options is the individual retirement account, or IRA. It comes in two major types: the traditional IRA and the Roth IRA.

The big advantage of an IRA is that it provides you a tax break for saving, but it also offers other positives, too, such as tax-deferred growth on your contributions. The specific kind of benefits depends on the type of IRA.

Here are the differences between the two main types of IRAs:

Traditional IRA

  • Income requirements: Must have earned income. No maximum income, but tax-deductibility may begin to phase out at a modified adjusted gross income of $65,000 in 2020, depending on filing status.
  • Contribution limits: $6,000 per year in 2020, or $7,000 for those aged 50 and older.
  • When can funds be withdrawn? Funds can be withdrawn at age 59 ½ or after.
  • Tax benefits: The traditional IRA allows you to deduct your contribution from your income taxes, provided you don’t earn more than the maximum income. Any money in the account can grow on a tax-deferred basis until withdrawn.
  • Early withdrawal rules: Taking money out of a traditional IRA before age 59 ½ will typically result in taxation and may be subject to a 10 percent penalty.
  • Required minimum distributions: Yes, after age 72.

Roth IRA

  • Income requirements: Must have earned income. Modified adjusted gross income must be less than $124,000 for individual filers in 2020 — if it’s more than that but less than $139,000, a partial contribution is allowed. The phase-out for married filing jointly begins at $196,000. However, workers can still open an account via a backdoor Roth IRA.
  • Contribution limits: $6,000 per year in 2020, or $7,000 for those aged 50 and older.
  • When can funds be withdrawn? Contributions can be withdrawn at any time, and any amounts (including earnings) may be withdrawn tax-free after age 59 ½, provided the account has been open at least five years.
  • Tax benefits: The Roth IRA allows you to invest money after taxes and then take contributions and earnings out tax-free in retirement. Any money in the account can grow tax-free
  • Early withdrawal rules: Contributions can be withdrawn tax-free, but earnings may be taxed and subject to a 10 percent penalty.
  • Required minimum distributions: No.

These are some of the major differences between the traditional IRA and the Roth IRA, but the plans differ in other key respects, too. So it’s important to understand which plan works best for your situation.

Another popular option for retirement saving is the 401(k), which is established through your employer. A 401(k) may offer similar benefits as an IRA, but it has some major differences, too.

How to save in your 20s

The irony of retirement savings is that you need to start young. To fully enjoy the power of compound interest you need to maximize the years you give yourself to save. By the end of your 20s, aim to have as much in your retirement accounts as you earn in a year.

Build your emergency fund

Start small. Financial advisers recommend you have six months’ worth of essential expenses stowed away in a high-yielding savings account. That’s a rather daunting task for someone just starting out in their career.

Don’t worry, you don’t have to get there all at once. Aim for one month’s worth and then go from there. A fully funded emergency fund will stop you from dipping into your retirement accounts if you’re ever in need of cash, which would cripple your ability to count on compounding interest. Use the safety of a savings account to make sure your money is there when you need it, and score the highest interest rates by shopping around.

Start saving for retirement

Take advantage of your employer’s 401(k) plan

Try to save at least 10 percent of your pay, including any employer match, in a tax-advantaged retirement account, such as a 401(k). About 71 percent of workers have access to a retirement plan through their employer, as of March 2019, but only about 79 percent (of those who have access) used it, according to a March 2019 report from the Bureau of Labor Statistics. New workers may be auto-enrolled in a retirement plan, a great move except you may be set up to save a smaller portion of your salary — say, 3 percent — than what’s recommended.

Make sure to increase your contribution or at least set up an auto-escalation so that you put in more each year. And above all, make sure you’re getting any free match money from your employer. Here are some other smart moves to make in your 401(k) plan.

How to save without a 401(k)

If your employer doesn’t offer a 401(k) or you’re a part-time worker, consider a Roth IRA. You can save $6,000 (in 2020) in after-tax income, but the money grows tax-free and won’t be taxed when you withdraw the funds in retirement.

Alternatively, you can contribute pre-tax income to a traditional IRA — up to the same amount as a Roth IRA each year — and the funds aren’t taxed until you withdraw.

In order to replicate the simplicity of a 401(k), you can set up your direct deposit to automatically contribute to whichever retirement fund you choose. By directing just $500 of your monthly income to an IRA, you can max out your contributions for the year.

Start saving early

Let’s assume you start saving $6,000 in a 401(k) annually at age 22 and continue to save that amount until you turn 67. Assuming an annual return of 6 percent, you’ll end up with $1.45 million by the time you reach full retirement age.

Compare that with someone who starts saving a decade later and has only 35 years until retirement. That person will have to save nearly twice as much money each year to end up with the same amount by 67.

Bankrate’s 401(k) calculator will show you if you’re on track to reach your retirement savings goals.

Consider upping your allocation to stocks 

Play it aggressively by putting a high percentage of your portfolio in stocks. When you’re in your 20s, you have a long investment horizon. That means you can handle the ups and downs of the stock market, and potentially take advantage of its historically high returns, around 10 percent annually over long periods.

This asset allocation calculator shows you how to create a balanced portfolio of investments that fits your time horizon and risk tolerance. Instead of picking individual stocks, many experts recommend that you look to mutual funds, exchange-traded funds or target-date funds to diversify your investment portfolio, reduce your risk and still achieve attractive returns.

How to save in your 30s

By age 35, try to have two times your salary saved in your retirement accounts, on the way to three times that figure by age 40. You’ll want to continue all those good habits you began in your 20s, or shift into high gear if you’re behind.

Ramp up your emergency fund

Your 30s are when you really start to grow up financially. It’s when people typically buy a home, too. The median age of first-time home buyers in the U.S. was 33 in 2019, according to the National Association of Realtors.

Maturation, though, means you have more to lose. A late mortgage payment is a wholly different situation than missing rent. You don’t want to lose your house, which may increasingly become filled with children. Now is the time to increase that one- to three-month emergency fund to something closer to six months.

Ramp up your retirement savings

This is the time in your life when you start earning real money, making it even more important to save for retirement. If you’ve fallen behind on your 10 percent savings goal, make it up now and don’t be afraid to go even higher.

Now is also the time to take advantage of automatic increases in your retirement savings. You can set up a direct deposit into your retirement fund to increase by a set percentage each year. Since the increased percentage goes into your account automatically, you won’t have the chance to miss it.

You can also begin to stash more of those pay raises into savings, rather than spending them.

Get on the same page as your spouse

Many Americans are getting married around this time of their lives. This means tying yourself to someone, both romantically and financially. The two have a way of affecting each other.

According to Bankrate’s sister site CreditCards.com, 17 percent of Americans in relationships have hidden a financial account, such as a credit card or a savings account, from their spouse.

Twenty-seven percent of respondents said such financial infidelity is worse than physical cheating. Successfully reaching your retirement goals will depend on clear communication with your spouse on all things financial: from the budget to how much to save, and planning for what you want to do in retirement.

How to save in your 40s

Aim for four times your earnings saved by age 45, and six times by age 50. As your income ramps in this decade, so can your savings rates. And with two decades or more until retirement, you can still take advantage of the power of compounding.

Pay off debt

A number of families may be carrying a credit card balance in their 40s. Eradicating that burden can go a long way to freeing up more money to put toward retirement.

Sign up for a no-fee balance transfer credit card with a lengthy zero percent interest period so that you give yourself time to pay off the debt. Someone with a $7,000 balance could erase their debt with 15 monthly payments of $467 before interest kicked in.

Once the debt has been paid off and you’re sufficiently used to living without that money, raise your retirement contributions by a similar amount.

Don’t get too conservative

At 40, you’re still a long way from retirement, so don’t play it too safe with your investments, says Ellen Rinaldi, former executive director of investment planning and research at mutual fund company Vanguard.

Rinaldi recommends scaling back stocks to 80 percent of your portfolio and putting the balance in conservative holdings like bonds.

Maintain a broad view of all of your holdings as you re-allocate assets. It’s not just enough to focus on the 401(k). Take all of your investments into account. Don’t forget retirement accounts or benefits from previous jobs either. If it’s an old 401(k), you can roll that into an IRA or your current employer’s 401(k), and you can invest any way you want.

“It happens all the time — people leave money in a 401(k) and forget about it,” says J. Michael Scarborough, CEO of Retirement Management Systems. “They take more time on their vacation than they do on retirement planning.”

Put college savings in perspective

Hopefully you’ve been saving for their higher education since your kids were in diapers. If so, you’ll be able to keep chipping away without diverting huge sums of cash from your retirement savings. If you’ve neglected to save for college and your 401(k) is less than robust, you may not have enough money to fund both.

Many parents often sacrifice their own retirement planning to take care of their kids — even those who have already graduated from college. A recent Bankrate survey found that half of Americans have jeopardized their retirement savings to pay for their adult children’s bills — and that can be a big mistake.

“When forced to make a choice, people support their own children first. They’ll put themselves last,” says Merl Baker, principal at the financial consulting firm Brightwork Partners. “They’re reconciled to working longer than they planned or expected to. Or they accept a lower quality of life. It’s pretty powerful.”

If you’re determined to help your child and money will be tight, look for compromises that may have less of a negative impact on retirement savings, such as sending your child to a local, in-state school instead of an expensive private college.

Remember: your child can take out a loan for college, but you can’t take one out for retirement.

How to save in your 50s

Aim for seven times your earnings by age 55, and eight by age 60.

Take advantage of catch-up contributions

Turning age 50 has some advantages, including being able to contribute more to your retirement account tax-free with catch-up contributions. In 2020, individuals age 50 or older can save up to $26,000 in a 401(k) and up to $7,000 in an IRA. Take advantage of these opportunities as soon as you’re able.

“It’s not hopeless,” says Dee Lee, certified financial planner professional and author of “Women & Money” while discussing those who have yet to get serious about their retirement savings.

Lee describes a couple who determines that they need to do some belt-tightening. If each contributes $10,000 a year to a 401(k) plan, they’ll have about $90,000 each after seven years, assuming the money grows by 7 percent a year, or a total of $180,000 between them.

But that’s a big assumption. Your portfolio would probably have to be allocated heavily in the direction of stocks, and have risen when you need them to. Historically, stocks (as represented by the Standard & Poor’s 500 index) have earned about 10 percent a year, while bonds (as represented by the Vanguard Total Bond Market Index Fund) have clipped along at roughly 3.6 percent over the last decade. If you’re unwilling to invest in stocks, you may very well wind up short of your goals.

Those in their 50s, nevertheless, are generally too young to flee to the safety of cash instruments.

“This is not the time when you go to cash,” Rinaldi says. “You may stay 50-50 in stocks and bonds. But you’re going to need growth in your portfolio.”

Figure out your retirement budget

How much is enough? That depends on your lifestyle and expenses, potential medical bills and the kind of support you’ll have from, say, a pension plan and Social Security. But as you review your savings goals, be careful not to set the bar too low, thinking you’ll spend less in retirement.

“People typically don’t downsize,” says Harold Evensky, certified financial planner professional and chairman of Evensky & Katz in Coral Gables, Florida. “It’s not uncommon for them to spend more in retirement than less.”

Fill out a comprehensive retirement expenses worksheet to get a sense of where your money is going when a paycheck is no longer coming in.

To get a more personalized account, contact a fee-only certified financial planner, and make sure they put your needs before their own.

Plan for medical costs

Safeguard your finances against unexpected medical costs. Some hefty medical bills can quickly eat up a lifetime of savings. A couple in their mid-60s will need $285,000 to cover health care costs in retirement, according to a 2019 Fidelity estimate.

Then there’s the stratospheric cost of extended care at nursing homes. A report from Genworth says the median annual cost of a private room in a nursing home was $102,200 in 2019.

With that in mind, retirement planning must include some consideration of future medical costs. One option is long-term health insurance, which pays for extended medical care including such things as nursing and assisted living — but it can be expensive.

“It has to be easily affordable not just for today but for the whole premium period,” says Marilee Driscoll, founder of Long-Term Care Planning Month, a public-awareness effort that takes place during the month of October.

How to save when you hit retirement age

Once you’ve reached retirement age and it’s time to dip into your savings, there are still ways to save and make the most of your lifetime earnings, stretching them out to cover your whole life.

Use Social Security to your advantage

Social Security benefits can be a major factor in your retirement fund. Based on your birth year, your eligibility for full benefits may vary, but you should look into the best option for you.

For those born in 1960 or later, full retirement age, when you can receive full retirement benefits, begins at 67. Anyone born between 1938 and 1959 reaches full retirement on a varying scale between ages 65 and 67. You can claim Social Security benefits beginning at age 62, but in order to receive full benefits, you must wait until your full retirement age.

Social Security is a valuable addition to your retirement earnings. If you’re unsure when the best time is to claim your Social Security benefits, working with a fee-only certified financial planner can help.

Plan your retirement withdrawals strategically

When you begin using the money you’ve saved for retirement, determine the best time to access the funds in each account or plan.

Your tax-deferred accounts such as a traditional IRA or traditional 401(k) will be most efficient when your income tax rate is lower. In contrast, a tax-free account like a Roth IRA or Roth 401(k) will be more beneficial during periods when your income rises, and you can dip into those coffers without increasing your taxes.

Implementing strategies to reduce taxes can help you manage your income more successfully throughout your retirement years.

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