Knowing how you want to spend your retirement years, where you might like to live, and which activities you plan to pursue is necessary in determining the total amount of cash you'll need. A general rule of thumb suggests that you may need 60% to 80% of your current income per year in order to maintain your current standard of living in retirement. If you find this figure surprising, you are not alone.
Although many people think that their Social Security benefit will provide a large portion of their retirement income, for the most part, it is a supplement to their retirement savings, rather than a main source of income. You can get an estimate of your future Social Security bene–fits by going to the Social Security website at www.ssa.gov and using the online estimate calculator. By obtaining your estimate of benefits online, you can plan for the amount of income you will need to supplement your desired lifestyle.
Since Social Security provides only a portion of needed income, many people rely on savings to make up the difference. And yet, according to The 2019 Retirement Confidence Survey (RCS), 40% of respondents who are currently working report having total savings and investments of less than $25,000.*
With the decline in traditional pensions and the uncertain future of Social Security, individuals are increasingly responsible for their own retirement funds, but according to these statistics, many have yet to take that important first step.
Taking the First Step
Starting a retirement savings plan can be a lot easier than you may think. In fact, the first step is to accept “free” money. This means taking full advantage of all of your employer's benefits. This may include a traditional pension, also known as a defined benefit plan that your employer contributes to on your behalf, which is then payable to you upon retirement.
Today, a more common benefit option is a defined contribution plan, such as a 401(k). Your employer may offer a company match in contributions up to a certain percentage. That's free money increasing your principal that did not come out of your paycheck, but you must make the contributions. Employer–sponsored 401(k) plan contributions may be deducted from your paycheck before taxes, and have the potential to grow tax deferred.
Because money is deducted from your gross pay, you may find that your contributions have a relatively small impact on net income, and can be of great benefit to your overall nest egg. For example, saving $5,000 today, over a period of 15 years, at a hypothetical 5% rate of return, could amount to over $10,569 in additional savings income.
Individual Retirement Accounts
Since retirement may require 7590% of your current income, many people are contributing to Individual Retirement Accounts (IRAs) in addition to employer-sponsored retirement saving plans. Traditional and Roth IRAs allow for annual contributions of $6,000 in 2019 for those under age 50. For those age 50 and older, annual “catch up” contributions of an additional $1,000 are allowed in 2019. Funds in both accounts will be subject to a 10% Federal income tax penalty if distributions are taken before age 59, however, certain exceptions apply.
Depending on your income and participation in an employer–sponsored plan, contributions to a traditional IRA may be tax deductible and earnings grow tax deferred until you retire. Contributions to a Roth IRA are made after taxes, but are tax exempt when you withdraw in retirement, provided you are age 59 or older and have owned the account for at least five years. Taking the opportunity to save as much as you can afford each year could have a favorable and significant impact on your ability to reach your retirement goals.
You can achieve your retirement goals and live the lifestyle you desire, if you develop a game plan. Take time now to evaluate your resources, set retirement goals, and take the necessary steps to reach them.
* Source: Employee Benefit Research Institute (EBRI), The 2019 Retirement Confidence Survey (RCS).
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