How much should a young person save for their retirement? It’s a good question, and one that is asked all the time. There are many factors that determine how much should be saved, but most of them relate to circumstances that cannot be accurately predicted 40 years in advance. No one can say with any certainty whether the social security program will still be operating, and tax rates could be higher or lower in 4 decades. The cost of living will undoubtedly have changed by then as well.
Kiplinger.com speculates that income taxes will continue to rise, and by anyone’s guess that is a safe assumption. At any rate, preparing for a higher tax rate can only improve your chances of retiring comfortably. This makes a pretty good case for investing in a Roth IRA instead of a 401(k) plan. Roth IRAs are subject to withholding at the current tax rate and are not taxed upon withdrawal, whereas 401(k) plans are not taxed until the money is withdrawn. If you believe that your tax rate will be lower in the future, then perhaps you should consider a traditional 401(k) savings plan instead. An even better alternative is to diversify your savings between both types of retirement savings plans, thus preparing for whatever rates you may encounter in the future. Employer contributions must be put into a 401(k) plan, so if you choose a Roth IRA and your employer matches your contributions, you’ll end up with a 401(k) anyway.
It’s also a good idea to place some money in a savings account for emergencies. Experts say that about 3 months’ worth of income is a good starting point. The reason for this is that withdrawing money from a retirement account may require a waiting period as well as penalties for early withdrawal, and savings accounts do not have these restrictions. By maintaining a separate savings account for emergencies, you can rest assured that your retirement account will remain untouched and will be there when you need it.
There are also some obvious factors that can be used to predict how much you’ll need for retirement. The age at which you hope to retire is a big factor, as well as the standard of living you hope to maintain following retirement. If we calculate the amount needed for retirement as a percentage of income, then the standard of living question should resolve itself-- at a given percentage, higher income individuals will be saving more for retirement. That leaves only two questions that can be answered accurately: how many years you have left before retiring, and how long you will live after retirement.
The Center for Retirement Research at Boston College has compiled an exhausting amount of data into a study released earlier this year. According to the study, the typical American family needs to put away about 15% of their earnings in order to retire comfortably. Most households presently fall short of this target, however. The National Retirement Risk Index indicates that about half of American families have not saved enough to comfortably retire at age 65. The good news for them is that postponing retirement until the age of 70 reduces the amount of required savings to around 6%. That figure is contingent, of course, on the age at which one begins to invest. Younger people have a huge advantage because they have a longer working life ahead of them.
The 15% goal for retirement savings can be offset in any number of ways. Investing in a diversified stock portfolio can help, provided the returns are high enough. Today’s economic conditions are very unstable, however, and there is no guarantee of any return at all. Paying off your mortgage early is always a great idea, and reverse mortgages can go a long way to providing an income after retirement.
In conclusion, the goal for retirement savings is at least 15% for young workers, and the longer you wait, the harder it will be to retire with financial security.
Kiplinger.com speculates that income taxes will continue to rise, and by anyone’s guess that is a safe assumption. At any rate, preparing for a higher tax rate can only improve your chances of retiring comfortably. This makes a pretty good case for investing in a Roth IRA instead of a 401(k) plan. Roth IRAs are subject to withholding at the current tax rate and are not taxed upon withdrawal, whereas 401(k) plans are not taxed until the money is withdrawn. If you believe that your tax rate will be lower in the future, then perhaps you should consider a traditional 401(k) savings plan instead. An even better alternative is to diversify your savings between both types of retirement savings plans, thus preparing for whatever rates you may encounter in the future. Employer contributions must be put into a 401(k) plan, so if you choose a Roth IRA and your employer matches your contributions, you’ll end up with a 401(k) anyway.
It’s also a good idea to place some money in a savings account for emergencies. Experts say that about 3 months’ worth of income is a good starting point. The reason for this is that withdrawing money from a retirement account may require a waiting period as well as penalties for early withdrawal, and savings accounts do not have these restrictions. By maintaining a separate savings account for emergencies, you can rest assured that your retirement account will remain untouched and will be there when you need it.
There are also some obvious factors that can be used to predict how much you’ll need for retirement. The age at which you hope to retire is a big factor, as well as the standard of living you hope to maintain following retirement. If we calculate the amount needed for retirement as a percentage of income, then the standard of living question should resolve itself-- at a given percentage, higher income individuals will be saving more for retirement. That leaves only two questions that can be answered accurately: how many years you have left before retiring, and how long you will live after retirement.
The Center for Retirement Research at Boston College has compiled an exhausting amount of data into a study released earlier this year. According to the study, the typical American family needs to put away about 15% of their earnings in order to retire comfortably. Most households presently fall short of this target, however. The National Retirement Risk Index indicates that about half of American families have not saved enough to comfortably retire at age 65. The good news for them is that postponing retirement until the age of 70 reduces the amount of required savings to around 6%. That figure is contingent, of course, on the age at which one begins to invest. Younger people have a huge advantage because they have a longer working life ahead of them.
The 15% goal for retirement savings can be offset in any number of ways. Investing in a diversified stock portfolio can help, provided the returns are high enough. Today’s economic conditions are very unstable, however, and there is no guarantee of any return at all. Paying off your mortgage early is always a great idea, and reverse mortgages can go a long way to providing an income after retirement.
In conclusion, the goal for retirement savings is at least 15% for young workers, and the longer you wait, the harder it will be to retire with financial security.
