Most Americans have less in their retirement accounts than they would like, and much less than the rules say they should have. So obviously, if this describes you, then you’re not alone. Now, most financial advisors recommend having between five and six times your annual income in a 401(k) or other retirement savings account by age 50. With continued growth over the remainder of your working career, this amount should generally allow you to have enough saved to retire comfortably by age 65.
Consider working with a financial advisor as you shape your retirement plan.
What your retirement savings should look like by age 50
Financial experts sometimes suggest planning for a retirement income of about 80% of your pre-retirement income. So, for example, someone who was making $100,000 a year in retirement would plan to have about $80,000 a year while in retirement. The reason for this discrepancy is that most families tend to have fewer needs and responsibilities while retired, and therefore fewer expenses. The one major exception to this rule involves healthcare. You should expect these costs to increase in your later years.
To make your savings last, financial experts recommend planning to withdraw about 4% a year from your retirement fund. This will depend on three main factors:
How much money do you have in your retirement fund
The average rate of return generated by your pension fund
Your expected Social Security income
So, for example, let’s say you expect to need $80,000 a year in retirement.
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First, you should check how much money you can expect from Social Security each month. This income will depend on how much you have earned during your working life and when you choose to retire. If you’re an average Social Security recipient, that works out to about $1,650 a month, or $19,800 a year. Then you should plan to withdraw another $60,200 per year to make up the difference.
Applying the 4% rule of thumb, or $60,200/0.04, suggests that this family will want approximately $1.5 million in their retirement fund. Other, more conservative recommendations suggest implementing these plans without taking social security into account. In that case, you would want about $2 million in your retirement fund.
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The 4% rule could result in an excessive withdrawal. It arises, in part, from conservative estimates of pension fund returns. By the time you retire you should have moved your portfolio into safe assets. Many pension funds, with relatively safe assets, will have a rate of return between 3% and 5% at this point, allowing you to bypass the replacement rate for your withdrawals.
So, someone making $100,000 a year will want to have about $1.5 million in their retirement fund by age 65. By age 50, then, many experts suggest that this retiree should have – at a bare minimum – about $600,000 more in a 401.(k), or other tax-advantaged account. This would give the retiree 15 years to increase their retirement nest egg by an additional $900,000, or grow by an average of $60,000 per year for each of the next 15 years. This is unlikely to happen without significant capital appreciation in the retiree’s tax-advantaged account. Many advisors recommend looking for a rate of return between 7% and 8% to reach the $1.5 million you need.
Reaching the retirement milestone
In addition to making sure your retirement fund’s asset allocation is aggressive enough, there are at least four other steps you can take to go from $600,000 at age 50 to $1.5 million at age 65.
Maximize your catch-up contributions
This is the most important thing you can do. The IRS limits the amount you can contribute to your 401(k), individual retirement account (IRA), and Roth IRA in a single year. After the age of 50 the ceiling increases, allowing you to pay the so-called “catch-up contributions”. In 2022, for example, most workers will only be able to contribute up to $20,500 to their 401(k) account. However, anyone age 50 or older can contribute up to $27,000. That extra $6,500 is significant, and between the ages of 50 and 65 it has time to add up to something very real. Take advantage of it.
Provident funds opened at the same time
The IRS allows you to contribute to a 401(k), an IRA, and a Roth IRA in the same year. However, there is overlap between the contribution limits for an IRA and a Roth IRA.
If you’re already maxing out your contribution limits to your 401(k) but are still worried that it’s not enough, consider opening an IRA or Roth IRA to supplement your savings. This will allow you to put money into multiple retirement accounts at once, helping you significantly increase your savings.
If you already have concurrent retirement accounts, simply consider opening a set aside account. While you won’t enjoy the same tax advantages, there’s no reason why you can’t save for retirement with a regular investment portfolio. You can invest as much money as you want, then plan to leave it there for retirement.
Manage debt, manage spending
A great way to free up money is to stop paying interest on debt. If you have existing debt, paying it off more quickly will reduce the amount you spend on interest and fees. This, in turn, will give you more money to dedicate to your retirement account.
When it comes to long-term debt, like a mortgage, paying it off more aggressively can also reduce potential expenses in retirement. You won’t have to make those payments, which can reduce the amount of money you’ll need each month once you stop working.
At the same time, consider your overall lifestyle. If you think you don’t have enough for retirement, are there ways to make long-term lifestyle changes by reducing expenses? Is there somewhere less expensive you could live, for example? It’s not as simple as skipping your morning cappuccino. Instead, consider whether you can shift your monthly needs in a way that could significantly change your budget both today and in retirement.
Consider working harder and retiring later
If you don’t have enough money to fund additional retirement accounts, consider taking on additional work to earn that money. This can range from freelance or gig work to a formal part-time job.
This is not a recommendation we make lightly. By the time you’re fifty, the last thing most people want to do is “hustle.” However, side hustling is a good way to boost your finances, and if you need money for retirement, then it has to come from somewhere. More importantly, while it would be unpleasant to need a second job at 55, it would be much worse to need a job at 75. Working today could help ensure you don’t have to do it tomorrow.
The jump in Social Security payments from normal retirement age to age 70 is significant. If you were born between 1943 and 1954, you will receive 100% of your monthly benefit if you begin receiving benefits at age 66. If you start receiving retirement benefits at age 67, you will receive 108% of your monthly benefit because you delayed getting benefits for 12 months. If you start receiving retirement benefits at age 70, you will receive 132% of your monthly benefit because you delayed getting benefits by 48 months.
Most financial experts suggest that retirees should have five to six times their annual income set aside in their retirement account by age 50. If you haven’t achieved this goal, it’s probably a good time to maximize your catch-up contributions and consider opening one or more additional retirement accounts. Also, make sure your investments are ready for capital appreciation, which obviously carries more risk, and reduce discretionary spending.
Retirement Planning Tips
We can all use help with our finances, and especially when it’s time to save for retirement. This is where a financial advisor can offer valuable guidance and insights.
Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, start now.
Use SmartAsset’s 401(k) calculator to get a quick estimate of how much you’ll have in your 401(k) when you retire.
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