How much should you have saved for retirement? Is $2 million in your 401K even enough anymore? Should you have 1x your salary saved by the time you are 30? We have all heard these guidelines for saving for retirement, but how much do you really need?
Guidelines are good and you should take them as just that. Everyone's situation is different and we each have our own reasons that cause us to save more or less for retirement. The most important thing is that you are taking the steps to save right now.
It's Never to Early or to Late to Start Saving for Retirement
If you are just starting out, it's important to save and invest as much as you can. Let compounding interest work in your favor. The biggest advantage that you have is TIME. Take for example the difference in starting to save at 28 vs.38 even at the same savings rate and annual growth. Starting to save as early as you can is important.
- 28 year-old saving $10,000 annually with 7% growth = At age 65: $1,603,374
- 38 year-old saving $10,000 annually with 7% growth = At age 65: $744,838
This is over $800,000 dollar difference!
If you are over 50 and didn't start saving as early as you should have, take advantage of the catch up contributions. If you are over 50 you can contribute an extra $6000 annually into your 401K or employer sponsored plan.
Think outside of your 401K or Employer Sponsored Plan.
The obvious answer answer to saving more for retirement is to increase your savings rate into your 401K or Employer Sponsored Plan, if you are covered under one. The maximum that you as the employee can contribute to a 401K this year in 2019 is $19,000 if you are under 50 and $25,000 if you are over 50. This is a great place to start. If you have already maxed out your 401K or even if you haven't you should think about diversifying the types of money that you have.
Roth IRAs generally offer you tax free benefits after age 59 1/2. The money you contribute to the Roth IRA is after tax money. If the money is invested, it will grow tax free. When you take distributions after 59 1/2 it will be fully tax free; however, the Roth IRA must have been established at least five years before they can be withdrawn.
Roth IRA are a fairly new concept. They first started in 1997, so Millennials and Gen-Xers will be the first generation with 30+ years of Roth assets in their portfolios. This is a great way to generate tax free income in retirement. There are a couple of things to keep in mind. The max you can put into a Roth IRA for 2019 is $6000 ($7000 if you are over 50). There are also income limits for Roth IRAs. If you make more than $193,000 married filing jointly in 2019, you can't contribute to a Roth IRA.
For higher income earners, if your company offers a Roth 401K option you will be able to have the same tax free benefits at a higher savings rate ($19,000) and without income limits.
If you have maxed out your 401K, Roth IRA or IRA and still have money to invest, you can open an Individual or Joint account and invest in a non-qualified account. Think of it as having three different types of money in your retirement portfolio.
- Tax Deferred Money
- Money is invested pre-tax and grows tax deferred. When you take a distribution after age 59 1/2 the amount is taxed at ordinary income tax rates.
- Tax Free Money
- Money is invested on an after tax basis and grows tax deferred. When you take a distribution after 59 1/2 the amount is tax free.
- Taxable Money
- Money is invested on an after tax basis and the earnings are taxed annually at capital gains rates.
Don't just spend it. Every time you receive a raise, increase your savings contribution percentage.
Dedicate at least half of the new money to your retirement plan. And while it may be tempting to take that tax refund or salary bonus and splurge on a vacation, don't treat those extra funds as found money. Treat yourself to something small and use the rest to help make big leaps toward your retirement goal.
The easiest thing to do is increase your contribution rate by 1% every year.