Your retirement might be a long way down the road, so you’re saving for it. Or maybe it’s just
around the corner and you’re beginning to plan. The goal is relatively worry-free financial
independence when you retire. So either way, saving and planning now is a smart idea.
Why the urgency? These days, most people have to fund their own retirement.
The sooner you start, the more potential your money has to grow over time. It’s all about
compound earnings—when your money earns more money.
Let’s say you invest $10,000. And you earn 5% over a year. So now you have $10,500. Over the
coming year, you make 5% not just on your initial $10,000 but also on the $500 you earned last
year. That’s compound earnings.
Take a look at the graph below. It shows how starting early could make a big difference in your
nest egg at retirement.
The power of starting early
Assumes $400 saved every month with a 6% annual return.
The assumed rates of
return in this chart are hypothetical and don’t guarantee any future returns nor represent the
returns of any particular investment. Amounts shown do not reflect the impact of fees, taxes, or
expenses. This is for illustrative purposes only
How much should you save?
Most experts say at least 10% of your income should go toward retirement. If you’ve started
saving late in life, you may need to save more than that.
If that just isn’t possible right now, that’s OK. Save what you can now and commit to increasing
1% every year until you can hit the mark. Try to save enough to get your employer’s matching
contribution (if they offer one) so you don’t leave any money on the table.
Another perk of saving in a retirement plan—like a 401(k) or an IRA—is the tax benefit.
With a traditional 401(k) or IRA (or a similar retirement plan), you generally won’t pay taxes on
the money you put in the plan until you take it out at retirement.
With plans allowing Roth contributions, you pay taxes up front—not when you withdraw it —as long
as you meet distribution requirements.
How much can you contribute in 2020?
|Type of plan
||Catch up limit (Age 50 or older)
|Workplace plans [like 401(k)s or 403(b)s]
Source: IRS.gov | Workplace plan limits may be lower.
(Relatively) painless retirement savings tips
Make it automatic. Contributions to your employer’s retirement plan can come
straight out of your paycheck. Your employer’s plan may even let you automatically increase your
contributions every year.
Put your raises to work for you. If you get a raise, increase your retirement
contributions, too. That way you won’t miss the extra money.
Take advantage of debt payoffs. Focusing on paying off debts? When you’ve
cleared them, put that payment money toward your retirement savings.
Max it out. If you really want to boost your retirement savings, know how much
you can save in a retirement plan.Take a look at the chart on page 15 to see contribution limits.
The shift from saving to spending
Once you move into retirement, you’ll shift to spending that money you’ve saved.
Identify what you’ll spend each month in retirement.
Identify how much money you’ll have coming in, and from where. Some can be guaranteed income,
like Social Security or an annuity. Some can be variable, like a 401(k), depending on what you’ve
Match what’s coming in with your expenses.
If you’re off, reach out. A financial advisor can help you plan how to fill the gaps.
Even if it’s a long way off, saving and planning for retirement is a good idea.
steps to creating your retirement plan