By Akogu Yusuf
Even if you have decades to go until retirement, the time to get started saving was yesterday. The longer you wait to get serious about this big honking goal, the more you will need to contribute to land in retirement in good shape.
There’s no one rule for how much you’ll want (read: need) to save for retirement, but a solid guideline is to have a multiple of your salary set aside at different ages. As you can see below, having retirement account balances equal to two times your salary by age 35 sets you up for success. When you’re 50, the aim is to have six times your salary in retirement account, and by your late 60s, having 10 times your salary saved up is recommended.
The best way to save for retirement is to use special accounts that give you valuable tax breaks. Many workplaces offer retirement accounts that you contribute to, such as 401(k) and 403(b) plans — the former by private employers, the latter by nonprofits and the government. And everyone with earned income can contribute to their own individual retirement account — or IRA, for short. Many brokerages offer IRAs.
With both 401(k)/403(b) plans and IRAs, you may be able to choose between a “traditional” account or a “Roth” account. The difference is when you grab your tax break.
With traditional 401(k) and 403(b) accounts, you get an upfront tax break: Your contribution reduces your taxable income for the year. Traditional IRA accounts may also qualify for this upfront tax break, depending on your income. When you eventually make withdrawals from traditional retirement accounts, you owe income tax on every dollar you withdraw.
Roth 401(k) plans and IRAs deliver the tax break in retirement. The money you contribute today doesn’t reduce your current income and your contribution is made with after-tax dollars. But when you make withdrawals in retirement, there will be no tax owed.
There are lots of moving pieces to nailing saving for retirement. Here are some key steps to take at different life stages.
In your 20s:
Start saving at least 10% of your gross salary ASAP. Saving 15% is even better. If you wait until your 30s to get serious about this, you’ll likely need to save 20% or more of your salary to reach your retirement target. If you can’t get to 10% right out of the gate, commit to a plan to boost your contribution rate at least one percentage point a year.
Don’t pass up a workplace retirement saving bonus. If you have a workplace plan, chances are you were “auto-enrolled.” So far, so good. But there’s a trap, too: Lots of plans automatically set your initial contribution rate at a level that is too low to qualify for the maximum matching contribution they offer to all employees. Grrr! Check with human resources that you are contributing at least enough to get the maximum match.
No workplace plan? Check out IRAs. If you are an independent contractor/perma-gig worker, you qualify for a SEP IRA, which allows savers to contribute more each year than regular IRAs. That said, SEP IRAs only come in the traditional format; there is no Roth version of a SEP IRA. By the way, officially, SEP IRA is a Simplified Employee Pension Individual Retirement Arrangement.
Consider saving in a Roth. Chances are you’ve yet to hit peak earnings, right? That means you’ve also probably not hit your peak income-tax rate, either. When you are in a lower tax bracket, a Roth 401(k) or a Roth IRA can make a lot of sense, given there’s not a big value in getting the upfront tax break from a traditional account. Anyone can contribute to a Roth 401(k) or 403(b) if the plan offers it, but there is an income cutoff (it’s pretty high) to be eligible to save in Roth IRA.
How to save for retirement
Julie Berninger, 30, chose a retirement strategy that would give her husband access to a savings plan.
In your 30s:
Just getting started? Aim to contribute 15% of your gross salary.
Don’t cash out when you job-hop. If you have a workplace retirement plan, you are allowed to move the money when you leave the job. One option is to take the money as cash. This is a seriously bad move. Not only will you trigger a 10% IRS penalty, but you may also owe income tax. And most important: You’ve just stolen from your future self, who is going to need that money in retirement. Leave the money where it is, or consider a 401(k) rollover.
In your 40s:
Fire up an online retirement calculator. Now’s the time to see if you’re in the ballpark of where you want to be in 20 or so years. If you’re coming up short, start picking apart your budget (and lifestyle) to find ways to save more. By your 40s, most financial advisors recommend having two to three times your annual salary saved in retirement funds.
Prioritize retirement over paying for college. Cold-hearted? Ruthless? Not if you work with your kid to focus on schools that are a good financial fit. Hint: It’s all about the net price— that doesn’t require you to raid your retirement account or slow down on your savings. That reduces the odds the kids will need to support you in retirement.
Steer clear of lifestyle creep. Yep, you’re making more now than in your 20s but, um, are you spending it all?
In your 50s:
Here are some numbers to consider. By age 50, experts say to have six times your salary saved. By age 55, have seven times your salary saved.
Get an estimate of your retirement income. There are online calculators that can help you hammer out a sense of how much monthly income you may be able to safely generate from your retirement savings, Social Security check and pension benefit — if you have one.
Consider bringing in a pro to strategize. You may enjoy being a DIY retirement saver. But given all the moving parts in hatching a successful retirement income plan, you might consider consulting with a certified financial planner to work through your retirement income plan. There are many planners who charge a flat or hourly fee for a specific assignment. Or you might want to consider hiring a pro on an ongoing basis to help you manage your finances throughout your retirement.
Take advantage of catch-up contributions. Once you cross the retirement savings Rubicon that is the half-century mark, the annual contribution limits for IRAs and 401(k)/403(b) plans rise. If a spin through an online retirement income calculator didn’t deliver the numbers you’d like, stuff more money into your accounts now.
Build tax diversification. If you’ve done most of your workplace retirement savings in traditional accounts, you might want to consider spending a few years saving in a Roth equivalent, if your plan offers one. Retirement planning experts recommend adding some Roth retirement savings as a way to create “tax diversification” that can help keep your IRS tab down once you retire.
In your 60s:
Check if these numbers add up. By age 60, have eight times your salary saved. By age 67, have 10 times your salary saved.
Consider waiting to claim Social Security. You can start collecting your retirement benefit at age 62. Every month you delay past 62 earns you a higher eventual payout. Wait until age 70 and your payout will be 76% higher than what you’d get if you claim eight years earlier.
Earn just enough to avoid starting retirement account withdrawals. If you want (and can) continue to work full-time at a fast-paced job, that’s great. But if you’re ready to downshift or you were pushed out of your career, a practical strategy may be to work at a job that brings in enough to cover your living expenses, even if you can’t afford to continue to add to your retirement savings. At this point, giving what you have already saved more time to compound before starting withdrawals is a smart move.
INVEST FOR RETIREMENT WITH A LONG-TERM FOCUS
What you manage to save for retirement is the biggest factor in how comfy you’re going to be when it’s time to step off the work treadmill. But how you invest the money in your retirement accounts plays a large role, too.
Saving for retirement breaks down into how much you want to invest in stocks and how much in bonds. As if this needed pointing out now, stocks can be volatile at times, though over long periods (10 years or more) they have historically delivered higher returns than bonds.
Bonds are more chill. They don’t fall like stocks in rough times — in fact, they typically rise when stocks are cratering. However, they don’t gain as much as stocks, either.
A hidden risk to consider when you are deciding on your mix of stocks and bonds is inflation. That’s the annoying fact that, over time, stuff costs more. Even at a benign 2% inflation rate, what costs $1,000 today will cost more than $1,600 in 25 years. Stocks over long stretches have produced the best inflation-beating gains.
The right stock-bond mix depends on your personal goals, stomach for risk and time horizon — or number of years you expect to hold your investments. Jack Bogle, renowned founder of Vanguard and tireless advocate for individual investors, suggested this simple rule of thumb: Subtract your age from 110. That’s how much, percentage-wise, you might want to keep in stocks.
Big-ticket purchases typically involve taking out a loan. The house you want to buy. The cars you drive. Helping your kids pay for college.
The key to building financial security is to only borrow what you truly need. And that can get tricky because right when you are looking to buy a house/car/college education, the lenders are focused on telling you the maximum you are allowed to borrow. No one is going to look you in the eye and suggest you borrow less. Lenders have no clue, or interest, in how the loan they are dangling in front of you impacts your ability to meet all your other goals.
That’s on you. Your goal should always be to borrow as little as possible to meet your goal. The less you borrow, the more money you have for other goals. You need a car? Okay, but do you need a new car tricked out with every premium package? Might your financial life benefit from considering a less expensive model? Buying a used car that has been on the road for three or so years means you’re letting someone else pay for the 40% to 50% depreciation that is common in the early years after buying a new car.
Millennial who saved $1 million: Buying a new car is ‘one of the worst financial decisions you can make in your life’.
Same goes with the house. A recent study found that the median price of a four-bedroom home was $100,000 more than a three-bedroom. Or consider a slightly longer commute, which can also be a big money saver.
Borrowing as little as possible is how you free up hundreds of dollars in your budget to put toward other goals.
Once you determine your maximum borrowing budget, doing some advance prep work to get your credit score as high as possible can help you qualify for the best deal.