Savings milestones for retirement

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Key savings signposts for retirement

Among all the decisions you have to make with your money, how you save for retirement is one of the most significant and sometimes the trickiest. It’s hard to think about how much savings you’ll need at age 75 when you’re 25.

Luckily, there are retirement milestones along the way that will help you stay on track. Some are mandated by law; others are up to the individual. But each milestone gives you the chance to take stock of what you have, where you want to go and how much you’ll need to save to get there.

Starting your first 401(k)

The first milestone is different for everybody. It happens when you get your first job. If your employer offers a 401(k) plan, the advice of financial planners is pretty much unanimous: Take that offer, no matter how young you are and how remote retirement seems to be.

Even teenagers who get a regular paycheck can open a Roth IRA. The message from the first retirement milestone is clear. The sooner you get the magic of tax-free compound interest working for you, the better.

“The earlier you get started, the easier it is, not just to accumulate funds, but because it gives you more time to think about what your retirement will look like,” says Tad Fryer, a manager for Charles Schwab in St. Louis.

Jump ahead to age 50

For the next retirement milestone, you have to jump a few decades ahead to age 50. That’s when the “catch-up” provision kicks in. If you’ve been lax about socking away money in your employer-sponsored 401(k) retirement plan, the catch-up allows you to make up for lost time by increasing the amount you contribute to the plan, according to the IRS. If you are age 50 or older, you can add an additional $5,500 to the contribution limit for 2010. (A catch-up provision also allows you to contribute an extra $1,000 to an IRA.) Other workers can contribute a maximum of $16,500 per year to a 401(k), Fryer says.

Bumping up the amount you stash away in your 401(k) or other plan, even if you’re late to the game, pays off in the long run.

On the cusp of retirement

One of the most eagerly anticipated milestones comes at age 59½. That’s when you can begin making penalty-free withdrawals from your 401(k). Distributions before that age get hit with a 10 percent early-withdrawal penalty, and you also have to pay income tax on the amount taken out. Some exceptions exist for workers age 55 and older, but all of those disincentives disappear six months after your 59th birthday. That’s when you can begin taking distributions, or set amounts you’d like withdrawn every month. You can also take out your money in a lump sum, says Jean Setzfand, director of financial security for AARP.

Before you cash out, retirement advisers urge a little caution. You don’t want your money to run out too soon.

“People are living much longer now,” Fryer says. “Nowadays, for a married couple that makes it to age 65, odds are very good they’ll live until their 80s, and perhaps 90s.”

Should you take Social Security early?

At 62, you can begin receiving Social Security benefits, but you might want to put off the party for a few years. You’ll get much smaller monthly checks if you start drawing on your Social Security the day you qualify. If you wait for a few years — or until you’re 70, the current “late retirement” age — your monthly take will be higher. The Social Security Administration has a handy calculator to help you decide.

Setzfand says retirement is different today than it was 20 or 30 years ago, so it pays to have your plans figured out before you start spending your savings and Social Security.

“You really have to think of it as an income stream,” Setzfand says. “But don’t just think about what you’ll need for the next five years. Think about it for the duration of your life.”

Depending on the kind of retirement you envision, you’ll want to replace up to 80 percent of your income with retirement savings, Social Security and your pension.

“That money has got to last you,” says Beth McHugh, vice president of market insight at Fidelity Investments in Boston. “You’ve got to plan for the long term so you don’t outlive your savings.”

At age 70 and beyond

Here’s the final official retirement milestone: age 70. That’s when the government requires workers to begin taking Social Security and IRA disbursements. If you’ve waited this long and you’ve been diligent about putting money away throughout your working years, this could be the golden era that people dream of. You’ll have the money and time to do what you’ve always wanted.

“Make sure you have enough to cover the basics of life,” AARP’s Setzfand says. “Then you’ll be free to do other things.”

Additional resources

For more retirement tips, check out these additional links on