Prioritizing Retirement Savings and the Basics of Retirement savings Plans.

Are you ready for retirement? Have you even thought about it? Financially, I mean. Do you have a plan that you’re contributing to regularly that will be able to sustain you and your family when you reach the end of your working life?

It’s a serious question. Are you ready?

If you are like most Americans, then you’re counting on Social Security and perhaps an old pension to cover your golden years. Or maybe, you’ve even put away some money on your own. But you’re not sure if it’s enough, and Social Security should make up the difference? Right?

According to this Vanguard study, the average 401k balance in 2017 was just over $103k. Not too bad, right? Sure, if you’re 35 or younger. But not if you only have a few years left to save before retirement age.

If you follow the 4% rule, $103k will only generate a little over $4k per year to live on. That is clearly not enough. We’ll talk more about the 4% rule later on, but for now, just remember that you will most certainly need more than the average balance of $103k.

And it gets worse, according to that same study, the median 401k balance is just $26k!! That means exactly half of all people who have a 401k have less than $26k in it.

So where do you fall on that spectrum? Are you in the less than $26k camp, or are you well on your way to retiring with dignity?

How Do I know How Much I Need for Retirement?

First you need to know your expenses. If you’ve been tracking your spending, and using a budget, it shouldn’t be too difficult to come up with an annual expense number.

For discussion, let’s use $36k per year, or $3000 per month. According to the 4% rule, you’ll need $900k to support a $36k per year lifestyle. ($36k x 25 = $900k)

Are you on track to have $900k available to you in retirement?

The 4% Rule.

First of all, this rule is not really a rule. It’s more of a guideline. And it refers to an annual withdrawal rate.

According to a study completed by William Bengen in the early 90s, if you withdraw 4% of your nest egg, and then adjust your future withdrawals based on inflation, your nest egg has a good chance of lasting 30 years or more.

In the study, Bengen concluded that there was no 30 year period in the time between 1926 and 1976 where a 4% withdrawal rate would have depleted a nest egg.

That time frame includes retiring right before the great depression!! It also includes the high inflationary periods in the late 40s and mid 70s.

Could things get worse than the great depression? And could inflation take off? Sure, both of those things could happen. But we need to prepare and plan based on probabilities instead of trying to account for every apocalyptic scenario.

Which brings us to another question regarding retirement.

How long will my money need to last?

You might say, “Who Knows? It could be 20, 30, or even 40 years. It all depends.”

While that’s true, you still have to plan. Just because you can’t nail down how long your retirement will be, doesn’t excuse you from planning.

If you retire at age 65, than realistically, your money should be able to last 30 years. You certainly shouldn’t plan for it to last for 50 years. You won’t live that long.

Although you might need it to last fifty years if you plan on retiring early.

If you plan on retiring at 65, you can back calculate how much time you have left to contribute. If you plug that time along with your final number into this calculator, you can figure out how much per month you need to contribute.

Keep in mind that although the stock market has on average returned 10%, you should update your plan periodically to make sure you’re still on track to reach your number.

What’s the Best Way to Reach My Number?

The rules that govern your taxes and contributions can be complicated depending on your situation. Realize that I am not a tax professional, and a financial advisor will be able to give you advice based on your unique situation. But for a top level overview, keep reading.

The IRS sets limits for how much you can contribute towards different retirement plans. So you need to know which plan(s) are available to you.

For 2019, the limits for an IRA (Individual Retirement Arrangement), Roth or Traditional, is $6000. You can contribute an extra $1000 as a catch-up contribution if you are over 50.

Also for 2019, the contribution limit for a 401k, 403b, or 457 plan from your company is $19000. And you can contribute an extra $6000 as a catch-up contribution if you are over 50.

You can contribute to both a company sponsored plan and an individual retirement plan. But depending on your income, you may not qualify for the tax deduction for the individual retirement plan. See this chart from the IRS for more details.

Where should I put my money first?

You should first contribute and max out if possible any work sponsored retirement plans. This allows for the greatest possibility of tax savings. Your company may also match your contributions. This is free money, and you should take full advantage of it. You may need to be vested to keep any of the match, so be sure and familiarize yourself with your company’s plan. And remember, your contributions are always yours, and you can take them with you when you leave.

If you still have money that you want to save for retirement after maxing out your work sponsored plan, then you should open your own IRA. This could be a Roth IRA or a traditional IRA.

Roth IRA definition: Contributions are with after-tax money. Growth is tax free. Contributions can be withdrawn after five years penalty free.

Traditional IRA definition: Contributions are with pre-tax money. Growth is taxed. Contributions cannot be withdrawn before retirement without penalty.

Depending on how much money you need to save to reach your goal, you may still need to save more money. If this is the case, you can always open a regular investing account. You won’t get any tax breaks for saving, but you’ll have access to that money should you ever need it.

Final Thoughts

For most of us, saving as much money as we can in a work sponsored retirement plan will be enough. But if you don’t have access to a plan at work, saving within your own IRA is good too.

I would encourage you to save within a Roth IRA because of the tax free growth and the ability to withdraw money penalty free. Even if you have access to a plan at work, I would still encourage you to open up a Roth as well.

But of course, the most important thing is to actually save. You won’t have anything in retirement if you didn’t save it.

Related Reading:

Best Retirement Calculator from the Retirement Spot.

401k vs IRA from Money by 30

Where are you in reaching your number for retirement? What steps are you taking to retire with dignity?

Thanks for reading and sharing. I appreciate you the reader, and thanks again for stopping by.


Chris is the original Cash Dad. He's a father of 3 and a mechanical engineer by trade.

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